Scaredy Cats

Good day… And a Wonderful Wednesday to you! Hurricane Ike moves into the Gulf… Which way it goes from here isn’t good for anyone. We had another day of watching the euro (EUR) rally during the day, only to see it fizzle out by the end of the day. I go home each night and think all the way home about all this stuff going on, and wonder just who in their right minds would be buying dollars right now… Scaredy Cats that’s who. So here you go… Deep Thoughts by Chuck Butler.

Here’s the skinny on that thought… Ever since the Fed, Bank of Japan (BOJ), and European Central Bank (ECB) intervened in their coordinated, covert operation, market participants and traders are scared to death to short dollars, for fear of more intervention that could wipe out their trades, and post losses for them. Come on… These aren’t the currency traders that I grew up with! Those traders took any central bank intervention as a “challenge” and would laugh in the face of it! Central bank intervention usually meant it was a desperate measure to shore up a currency, and that was like blood in the water for a shark. Currency traders would hit that currency even harder!

But not these scaredy cats! That’s one thing I think about… And then there’s this…

The government’s decision to bail out Fannie and Freddie and place them into conservatorship may shore up the mortgage meltdown in the short term… But to me, this is just another in the line of things the Fed and Treasury have done in an attempt to bring calm to the financial markets. (Bear Stearns, mortgage bill, money supply, low interest rates, and dollar intervention, stimulus checks, and more!) But, when you step back and look at all this, none of it, and I mean NONE of it had done anything to alleviate the pressures on rising home inventories, falling home prices, upside down mortgages, unemployment, the deteriorization of the financial markets (see the dead man walking list of banks that are in deep dookie) and that doesn’t just mean banks. The major brokerages are standing on the street corners with their hands out, begging for any sovereign wealth fund that might give them a capital infusion. I started to describe them standing on the street corner in different light, but remembered this is a family newsletter!

And all that brings me right back to my call several months ago, and one that has been on the opposite side of the markets… And that is, that the Fed will come back to the rate cut table before they go to the rate hike table.

And when I think about all these fundamental problems with lower rates and money supply, I can’t think about anything else that this all does but cause dollar weakness (hence my conspiracy theory from last week). And here’s one step further that I’ve already mentioned before: dollar intervention is all “window dressing” for the elections… And thus, my previous thought that we could see this dollar strength through the elections, and maybe into next year, but eventually we come back to the weak dollar fundamentals.

On Monday… My friend, the Mogambo Guru was talking about gold (as usual), and printed this quote from Jeff Clark at Doug Casey’s Big Gold newsletter…

“Due to the bloating federal deficit and the big-dollar promises the politicians have made, but that the U.S. can’t possibly pay, further rapid growth in the money supply lies ahead. And that means more inflation, which means the dollar’s recovery will turn out to be temporary. And more debasement of the dollar equals higher gold.

“If the bull market in gold were over, it would mean that inflation was under control, the dollar’s long-term problems had been solved, the government had become restrained in printing new money, banks were healthy, house prices had stabilized, a surprising new source of energy had been discovered, unemployment was diminishing, and everyone was smiling.”

Yes, Jeff… My sentiments, exactly! I couldn’t have said it better myself!

So… All this strong talk, and… The dollar has the euro on the 1.41 ropes again. Yes, the euro is doing the “rope-a-dope” with the dollar punching its lights out. There’s not much else I can say about all of it. In the category of “not helping the euro”, the European Union cut their economic growth forecast for 2008 to 1.3% from the previous forecast of 1.7%… At least they don’t have currency weakness providing export growth as the main driver of their economic growth, like here in the United States! And for all those naysayers that keep banging on the EU’s economic growth, and saying the EU will have a recession… You may have noticed that the lower, revised growth forecast is still on terra firma in positive territory!

Monday and Tuesday saw carry trades being put on again. But… Late yesterday afternoon and overnight, those carry trades have gotten wiped out, as the markets – who’ve apparently checked their brains at the door – have come to the realization of what I was talking about above: that the government sticking their hands into the markets and acting like they know what they’re doing is not solving any of the problems hanging over the markets like the Sword of Damocles!

So, that means Japanese yen (JPY) gets some love again, and is trading well into the 107 handle… While Aussie (AUD) and kiwi (NZD) get taken back to the woodshed. I really didn’t think that return to risk positions was going to last long, but it was there and had to be talked about as the reason for the movements in those currencies associated with the carry trade.

My friend Jim Rogers had a lot to say about the bailout of Fannie and Freddie, comparing it all to communism. Here’s Jim Rogers… “America is more communist than China is right now,” Rogers told CNBC Europe’s “Squawk Box Europe” September 8. “It’s bailing out the financiers, the banks, the Wall Streeters.”

Yes, Comrade… I would agree with that. Jim Rogers also said, “I’m waiting for the dollar to continue to rally so I can sell my dollars. The dollar recovery is certainly taking place and has a ways to go; a few weeks, a few months, maybe even another year or so that the dollar could recover because it was beaten down do much.” He went on to say that he is buying the “victims of the carry trade”: Japanese yen and Swiss francs (CHF)…

I would agree with that too!

OK… The data cupboard is empty today, but tomorrow it gets restocked with the trade deficit, weekly initial jobless claims, and the monthly budget statement. Yesterday, the Budget Office offered up a number that would make one choke… The Budget Office said that we could see a $407 billion budget deficit this year. Hmmmm… I say this… If the Budget Office is offering up $407 billion now… It will be worse than that when all the dust settles! And… They obviously offered this up before the tallies on the tote board showed the results of the stimulus checks, and the Fannie and Freddie bailout!

How about that Screaming Eagle roller coaster ride in stocks? The stock jockeys can’t seem to decide whether they want to rally or sell off – one day down 300, the next day up 280, the next day down 300. I’m glad I don’t mess with stocks. I think that currency dolts make me yell at the wall now? I can’t even imagine trying to make heads or tails out of stocks!

My friend, Ian Mathias, over at The 5-Minute Forecast (which by the way is a “must read” each day), also does some additional writing. I was reading an article by Ian last night, titled “Enter the Fed’s Trash for Treasuries”… It’s a great read, and explains the Fed’s deal to take in the mortgage backed securities that no one else would buy because they were beaten down so much, and exchange them for Treasuries.

I don’t know about you… But I’ve stated before that this scenario scares the bejeebers out of me! The Fed & Treasury are totally out of control! But unless the media decides that this is important to talk about, it’s just Ian, me and a few of our adult beverage drinking buddies shouting from the rooftops… And right now, very few are stopping to listen.

That’s a real downer to end the morning Pfennig with… So… I’ll end it with the news that Lance Armstrong has announced that he is coming out of retirement, and has set his sights on winning another Tour de France! You show ’em Lance! You show ’em what a cancer survivor can do!

Currencies today 9/10/08: A$ .8055, kiwi .6685, C$ .9350, euro 1.4110, sterling 1.7570, Swiss .8835, ISK 90.98, rand 8.0225, krone 5.7075, SEK 6.7405, forint 170.40, zloty 2.4575, koruna 17.57, yen 107.50, baht 34.62, sing 1.4340, HKD 7.80, INR 45.14, China 6.8380, pesos 10.54, BRL 1.7770, dollar index 79.60, Oil $103.60 (strange that the oil price isn’t rising with Ike in the Gulf), Silver $11.25, and Gold… $774.75

That’s it for today… A great ninth inning rally from my beloved Cardinals to beat the Cubs last night… It’s probably too little too late for the redbirds, but, any time they can beat the Cubs, it makes the home crowd happy! (As it does for Cubs fans when they beat the redbirds at Wrigley). Had a visit from an old fave, Ellie Williams, yesterday. Ellie is a cancer survivor too, and that just makes me smile when I see her! Looks like the presidential race is a dead heat after both conventions. This ought to be a looooonnnnnggggg election period, I’m already tired of having to change the channel when one of either party’s “I approve of this message” ads come on! UGH! Was going to go on a walk through one of our digs in the building next door yesterday, which will be on the sixth floor, but had to back out when they told me the elevator wasn’t working yet! YIKES, like I’m going to drag me and my cane up six flights of steps? Yeah, right! Oh well, maybe someday! Time to go… Hope your Wednesday is Wonderful!

Chuck Butler
September 10, 2008

The Daily Reckoning