The Magical Currency Tour

Yesterday was an absolute “10” on the crazy meter, and yet “We the People” just continue to sit and take whatever the government and media tell us is “best for us in these uncommon times.” I’ve got some interesting words on this later in the letter… It’s time for me to get on my soapbox once again, so… At least I’ve prepared you! But first… Some currency news!

Well… Yesterday, I left you with the thought that the currencies were selling off, after the Asian central banks all made statements regarding their support of the dollar as the world’s reserve currency… Here are some further thoughts on that.

Roll up to the mystery tour… The Magical Mystery Tour is waiting to take you away…

Yes… It’s U.S. Treasury Secretary Geithner’s Magical Mystery Tour (which should be re-named the Magical Currency Tour)! OK… Remember yesterday I told you the Asian countries of S. Korea, India and Japan all made comments regarding the U.S. dollar as the world’s reserve currency, etc., etc. Well… Now we know more about why they all decided to make favorable comments about the dollar on the same night! They were behooved to do so by Geithner!

Well, at least the dollar bulls have someone they can get all excited about! But, the jury is still out on whether or not Geithner’s Magical Currency Tour will last very long… But yesterday, it carried a lot of weight! The currencies lost some major ground yesterday, as it certainly looked like a coordinated effort to pick the dollar up from the canvas, after spending three months in the ring with Rocky Marciano!

Because… In addition to Geithner’s Magical Currency Tour, we had Big Ben Bernanke on “the hill” telling lawmakers to “cut the budget deficit”… And the markets reacted as if… As if the lawmakers could do something about the budget deficit train that has already left the station! But the markets did react; and they reacted favorably for the dollar.

Hmmm… You don’t think that… Nah… I don’t want to say it, because the last time I did I got ambushed on that cable station that I refuse to mention by name! But this all smells of yesterday’s fish! So, I’ll just keep it as I said… That it was a coordinated effort to pick the dollar up from the canvas.

So… The Big Dog, euro (EUR), was sent back to the porch, and chained to it. The euro, which had traded up to 1.4320 on Tuesday, saw those gains and previous gains wiped out yesterday, as the single unit was pushed back to 1.41 and change. The rest of the little dogs followed the Big Dog back to the porch, and their kissin’ cousins gold and silver got taken to the woodshed!

But if you think that the move in euro was wild… You should have been in the driver’s seat here on the currency desk to witness the move in the emerging and commodity currencies! (Aussie (AUD), Brazil (BRL), South Africa (ZAR), kiwi (NZD), Canada (CAD)) Yes, they outperformed every other currency on the way up, and when the tables were turned, they led the way to under perform/lose more ground than every other currency! UGH! But… Hey! Didn’t I warn that these emerging markets were volatile? You have to strap yourself in, and remember to keep your arms and legs inside the car at all times!

The euro had recovered a bit overnight – moving back to a 1.42 handle – but has once again given that up, as the European Central Bank (ECB) is meeting while I write. The inner struggles at the ECB have really weighed on the euro the past two days. In the blue corner, we have the likes of Spain and Italy, which want, and think they need, quantitative easing, along with further rate cuts. In the red corner, we have Germany’s central bank, the Bundesbank, which wants neither! “Let the markets be!” is their mantra… And I have to say, that I agree with the Bundesbank!

The ECB President, Trichet, has his hands full of Big Babies, whining about this, that, and the other thing, but mostly about how the “other central banks are doing quantitative easing.” If I were Trichet, I would use the line I’ve always used with my kids, when they would tell me that the other kids were doing something… “But don’t you want to be better than the other kids?”

And, so… Trichet should tell the likes of Spain and Italy that the ECB wants to be better than the rest of the kids/central banks!

Unfortunately, I’m not convinced that Trichet has the intestinal fortitude to do that… So… The quantitative easing question hangs over the euro like the Sword of Damocles this morning. Who’s it gonna be? Spain and Italy… Or Germany’s Bundesbank that wins this tug-o-war!

The Reserve Bank of Australia (RBA), which earlier this week, kept their interest rates “steady as she goes,” warned the other central banks that cutting rates too low was dangerous… RBA Governor Stevens said, “policy makers must be cautious about lowering borrowing costs too far. Cutting interest rates further may be counterproductive as that might encourage some borrowers to take on debt they can’t afford.”

The Bank of England (BOE) is also meeting this morning… Not much can come out that meeting, as they’ve already cut interest rates to the bone, and implemented quantitative easing measures.

Getting back to the ECB meeting… I think the markets are going to be looking for any indication from Trichet that the ECB is “uneasy” with the recent upward moves of the euro. If he doesn’t mention it, the euro gets to go past “Go” and collect its $200… If he does mention it, the euro will not get to pass “Go,” will not get to collect its $200, and will go directly to jail… Let’s hope it has a “Get Out of Jail Free” card!

I think it does, and it’s called being the offset currency to the dollar… But some pain will have to come before it gets played.

And one of the reasons I think the “Get Out Of Jail Free” card will get played is the fact that the deficit spending in the United States recently got some very bad news, that you won’t hear on the TV news… Here’s the skinny.

The budget deficit this April was $20.9 billion, the first deficit in this “tax-paying” month in 26 years! Can you imagine that? In April when taxes were paid, we recorded a deficit? That’s pretty amazing, folks… April 2009 tax receipts dropped 44% compared with those in April 2008. OK… I also read where the money collected by taxes is only going to cover half of the fiscal 2009 federal budget, requiring the government to borrow and print more than $1.8 trillion to fund it. And that’s not the end of it… There are equal-sized deficits looming for fiscal year 2010 onward. (Read entitlement programs) Tax receipts fell 50% during the Great Depression. Now eight months old, this depression is already rivaling that drop!

Did you know that we as a country were in the red during April? Do I have to tell you what’s next for Jean and Joan and who knows who? Higher taxes! You won’t hear the lawmakers running around screaming that they need to cut government spending! Instead, you’ll hear them screaming that they need to increase revenue! HEY! Cut the spending, Jack!

Bill Gross, founder of Pacific Investment Management Company (PIMCO), is advising holders of U.S. dollars to diversify before central banks and sovereign wealth funds ultimately do the same amid concern about surging deficits!

You know… Bill Gross is like the old E.F. Hutton commercials (sorry youngsters, this will go right over your heads!) When Bill Gross talks… People listen! I suggest you do too! Here’s more, from Bill Gross speaking about Geithner’s statement to the Chinese about shrinking the budget deficit… “I think he’ll (Geithner) fail at pulling a balanced rabbit out of a hat. They are talking about, once the economy in the U.S. renormalizes, the move back toward balance or much less of a deficit. I suspect that will be hard to do.”

Big Ben Bernanke was right on one thing he talked about yesterday… And that is “a prolonged deficit will choke economic growth”… He said it! But, that’s almost like me saying it. He can’t do a thing about the deficit, and neither can I! He can try to be influential; I can’t even do that! So… I just think Big Ben is seeing the writing on the wall, and wants to be able to point out in a few years that he “told lawmakers to cut the budget deficit, and they didn’t listen to him, see how smart I was!”

OK… Now, I saw some news flash across the TV yesterday that just made my blood pressure rise quickly… OK… Remember when I told you that the government owning banks was a very bad thing? Recall me telling you how banks would be directed by lawmakers to make loans in the lawmaker’s districts, when it would not meet the bank’s requirements for a loan? This, among other things, would be very bad…

Well… Skip ahead to the government bailout of carmakers… Guess what? The lawmakers are going after the carmakers for closing dealerships in the lawmaker’s districts! That’s right… It’s happening right now! Let the government put their foot in the door, and, the next thing you know, the government is making out your grocery list and telling you where you can shop!

Well… As usual, I hold the Pfennig from going out on these first Thursdays of a month, to see if I can include the results of the BOE And ECB meetings. So… The BOE kept rates unchanged and refrained from expanding their quantitative easing, like the Fed Reserve did at their last meeting. This should be constructive to sterling… But you never know with these crazy markets these days!

The Daily Reckoning