The Bailout Lives

Good day… And a Wonderful Wednesday to you! Welcome to October! Or as we say in St. Louis… Rocktober! September went by in a flash; let’s hope Rocktober slows down a bit!

Well… Monday we had carnage in stocks, and yesterday in currencies, while stocks rebounded. What a difference a day makes! On Monday, the House voted down the bailout package (doesn’t it just get your goat that it’s still being referred to as the “rescue plan”?), and yesterday, seeing the collateral damage caused by the “no” vote, Congress decided to try and rescue the bailout plan.

And that, folks, is the story on the day… Stocks kicked sand in the face of other investments and currencies, and gold got taken to the woodshed. All because Congress is going to try and rescue the bailout plan. I have to ask those that made these trades based on this latest development in the bailout package… “Will the passage of this bill prevent the United States from sinking deeper into the recession we’re currently in?” According to those that want to instill “fear” in us (by the way doesn’t this all seem like déjà vu?), the whole economy will seize up and fail to operate if the bailout package doesn’t pass. That may be true… But, does the taxpayer really have to foot the bill?

I mean (I know you’re saying, here he goes again on his soapbox), come on! These guys led us to the river with their exotic mortgage options, no proof of information applications for loans, and the Fed with their low interest rates and liquidity out the… Well, let’s just say a lot of liquidity! But when they get their hands caught in the cookie jar, they come running back to the U.S. taxpayer!

Eurogroup Chairman Jean-Claude Juncker said in an interview this morning that “Bank rescues shouldn’t cost taxpayers anything”

Regarding liquidity… A reader sent me a nice tally sheet of “injections” of liquidity that the Fed has done in the last two weeks… The total “injections” have been $900 billion. (Some are done and some are announced). The reader was as confused as I am regarding this dollar strength… “All this liquidity and the dollar is still up, and commodities are still down… Go Figure.”

Well… Currencies and gold have had a tourniquet wrapped tightly around them to stop the bleeding, and the euro (EUR) has rebounded from 1.4025 to 1.4160. Martin McMahon, a Zurich based currency strategist for Credit Suisse Group had this to say about the dollar’s rally yesterday. “We don’t think that what we’ve seen over the last month is the beginning of a sustained dollar rally. There are still lost of problems for the dollar.”

Couldn’t have said it better myself!

OK… Months ago I told you about a pending banking crisis in Iceland, and how the market makers were cutting our ability to pay the high interest rates that reside in Iceland. Well, that banking crisis finally came to the front of the class on Monday, as an Icelandic bank failed… Then yesterday Fitch lowered their sovereign debt rating. When we went to the markets to buy some krona we got a rude awakening! The markets are now charging us to hold krona forward! So… Now the interest rates we can pay are zero, and should actually be negative! And the krona? I just cringe talking about this currency… But it has fallen to 107.60. What a shame…

So… Let me tell you about the latest rumors that are spreading across the markets… And that is… Drum roll please… A coordinated round of rate cuts by central banks. The European Central Bank (ECB) meets tomorrow, so we won’t have to wait long to see if this is in fact more than a rumor. Of course these rumors contradict what ECB President Trichet said last week, that the ECB isn’t interested in coordinated rate cuts… But, there you have it! I just don’t see the ECB bending their Maastricht Treaty mandate to provide price stability, and cut rates to debase the euro, just to help the U.S. and their dollar/credit crisis/ liquidity problem.

And… This morning, Germany, the European Union’s largest economy, posted a very strong retail sales number for August. Retail sales for August in Germany rose the most in almost two years! Falling energy prices are being made out to be the hero/cause of increased consumer spending during the month. OK… You know me… One swallow does not make a summer… And one strong retail sales print doesn’t make a turn-around in the German economy… But it’s a start! And… The way things were being talked about for the German economy, one would think that retail sales would have been negative, and the sky would be falling! But… There’s a ray of light… Let’s hope it continues to shine, eh?

I’m also hearing rumors that in China, the factories haven’t started up again, after being shut down for a couple of months before the Olympics so that the athletes could breathe. This is alarming news to me, for I figured China would spool right back up after the Olympics. I’ll have to do more follow up on this rumor… But it could explain the stuck-in-the-mud movements of the renminbi (CNY) lately.

Add to the rumors about China, the story I saw this morning that India’s manufacturing has slowed to the slowest pace in 14 months. Obviously, a slump in demand is going on here, which isn’t a good thing for the Indian economy. The rupee (INR) has gotten sand kicked in its face for months now without any reprieve, and apparently, the central bank couldn’t give two hoots about the rupee’s situation. The central bank first caused the rupee’s problems, as they intervened to stop the gains. They had better think about intervening now to stop the run off!

Yesterday’s data was a real head-scratcher! The S&P/CaseShiller House Price report showed more rot on housing’s vine. But get this… Consumer confidence gained! And not a tick here and there! Consumer confidence was much stronger! WHAT! ARE YOU KIDDING ME? No… I wouldn’t kid you Chuck! I shake my head in disgust… Pardon me for a minute as I go scream at the walls.

OK, I’m back now… Geez Louise, who are these surveyors talking to? Bill Gates? Warren Buffett? Britney Spears? HA! I just don’t get it… But then, I don’t get a lot of things these days… So, I remind myself that this is all “daily noise” and has nothing to do with the fundamentals!

Today, the data cupboard will yield the Challenger Job Cuts data, and the ISM Index (manufacturing) for September. The ISM should remain below the line in the sand at 50. For new readers, the ISM index line of demarcation is 50… Any number above 50 represents expansion, and any number below represents contraction… The number has been below 50 for over six months now.

So… We head into this Wonderful Wednesday with the currencies trying to win back friends and influence enemies, gold rebounding again, and Congress contemplating the bailout package… Looks like another crazy day in the markets… Oh, and stock futures are down, so the roller coaster ride in stocks continues.

Currencies today 10/1/08: A$ .8015, kiwi .6785, C$ .9450, euro 1.4150, sterling 1.7840, Swiss .8960, ISK 108.93, rand 8.2590, krone 5.8440, SEK 6.8710, forint 170.77, zloty 2.39, koruna 17.35, yen 106, baht 34, sing 1.4320, HKD 7.7680, INR 46.70, China 6.8450, pesos 10.93, BRL 1.9040, dollar index 79.07, Oil $100.80, Silver $12.24, and Gold… $873.15

That’s it for today… Good thing I get here before anyone else… This morning I arrived and parked my car, and then one of my all-time fave songs came on the radio, and I sat there and sang along… Ferry ‘Cross the Mersey, by Gerry and the Pacemakers… I used to sing that to my little buddy when he was a little guy, and I rocked him to sleep… Now, he’s 13, and playing football! I don’t think he would remember me singing to him, and I’m sure he doesn’t want me to sing to him now! HA! The baseball playoffs begin today, just seems kind of empty not having my beloved Cardinals playing! We have John Kimsey from Jacksonville on the trading desk this week, helping us out during these high phone traffic days. Good deal! Let’s see what the Senate comes up with today, and I’ll talk about it tomorrow! Until then, have a Wonderful Wednesday!

Chuck Butler
October 1, 2008

The Daily Reckoning