Turning Japanese?

Good day… And a Wonderful Wednesday to you! Another crazy day not only in the markets but also on our trading desk, where the phones continue to light up. There’s a ton of volatility in the markets these days, as witnessed by the roller coaster ride that stock jockeys take every day, the “no direction is a good direction” course of currencies, and the ups and downs of bailout plans. It’s all a little too much for yours truly some days, but I carry on.

Take this morning… Please somebody take this morning! The euro (EUR) was showing signs of wiping out yesterday’s profit taking session early on, only to see its gains wiped out by a weaker than expected German Business Confidence report. Yes, German Business Confidence, as measured by the think tank, IFO, declined more than expected this month, to the lowest level in almost three years. I would say that with lower oil prices, and weaker inflation, these German business people’s attitudes will be changing soon. The German economy, other than this report, is showing signs of strength, which is bang on with what I’ve been trying to tell everyone who was throwing darts at the Eurozone economy. Remember 80% of trade in the Eurozone is among the Eurozone members.

So… Yesterday we saw some swings in the currencies as the “un-dynamic duo” of Paulson and Bernanke were on “the Hill” pleading with members of Congress to accept the bailout package they had presented. At one point in the proceedings, Big Ben Bernanke admitted that the U.S. taxpayer would get caught in the middle, or something like that. Let me tell you this… So listen to me now, and hear me later… The $700 billion plan is not nearly enough to deal with this problem as a whole!

I was reading a letter that Mr. Martin Weiss was preparing to send to the members of Congress, and in it he details why the $700 billion plan falls way short. I can’t go into it more than that, as Mr. Weiss’ letter is a “paid subscription” letter, and if you want to read his wise words, you must pay for them. But I will say that Mr. Weiss really did a great job of presenting his points. Now, if only someone in Congress would read it and understand it enough to act!

You see, I’m banging on Paulson and Bernanke for adding taxpayer burden, and at the same time I’m banging on them because the package isn’t large enough! Talk about a catch 22! I just cringe when I think about this not being large enough to deal with the problem… Because, once again, it reminds me of the goings-on in Japan during the 1990’s… One stimulus package followed by another, and then budget plans, and bailouts. It all led to one disastrous decade for the Japanese. This is all too eerily familiar to me… I could sing, well… I’m turning Japanese, yes, I’m turning Japanese, oh yes I think so…

I can’t believe that I’m the only person on earth, right now, that is seeing this unfold and relating it all to the Japanese mistakes they made in the ’90s. My friends, Bill Bonner, and Addison Wiggin describe this in their book, Financial Reckoning Day, which was written in 2003… But they couldn’t have foreseen the goings on in 2008 then… Or could they?

The main story yesterday however, was the news after the market closed, of a $5 billion investment into Goldman Sachs by the Sage of Omaha’s Berkshire Hathaway. Goldman also announced that they would raise another $2.5 billion in a public common stock offering. Nothing like diluting the outstanding shares, eh? Oh, well… It’s their company; I’m not in it, so why would I care?

And in other news… The Fed announced a $30 billion swap line with Australia, Sweden, Norway, and Denmark. Remember this news… For it might come back to us sometime in the future. But for now, it was put in place to provide central banks of these countries, more cash to lend out. This might lead to increased carry trades in my mind… But, I’m sure that wasn’t the Fed’s intention!

Big Ben Bernanke goes back to “the Hill” today to speak, and then later will join his “buddy” King Henry Paulson in an attempt to get the bailout package passed. Big Ben did tell Congress yesterday that the bailout plan needed to get passed quickly, as any delay could cause the U.S. economy to go into a recession. Ahem! Memo to the “un-dynamic duo”… We’re already in a recession!

You know, the other thing about this plan that sticks in my mind, and nips at me like one of those little dogs nips at your ankles, is the fact that I can’t believe someone doesn’t stand up and say… “Why should we believe you now, when you’ve told us: 1. That it was only a subprime thing. 2. That the mortgage meltdown wouldn’t filter out into the rest of the economy, and 3. That the housing meltdown had bottomed in August of 2007!!!!!!!!!!”

But then, I’m reminded that former Fed Chairman, Big Al Greenspan, had a horrible forecasting record at his firm before being named Fed Chairman, and that one senator actually called him out for this horrible track record, and guess what they did? They appointed him anyway! UGH! SERENITY NOW!

So… As I suspected, the dollar gets a little McLovin’ while King Henry Paulson and Big Ben talk about how everything will be right as rain once this bailout package is passed. You see, the markets like to think that “everything will be OK” and they can stick their heads back in the sand and go back to Happy Days again… So, any time government officials talk about seashells and balloons for the economy, the dollar gets bought.

And trust me on this one… I truly hope that it can be the end-all for what ails the economy. Wouldn’t it be nice, if we could wake up in the morning, when the day is new… No wait! Wouldn’t it be nice, if we could all just get along? No wait… Wouldn’t it be nice if this plan were the end-all for the economy?

But you know me… I just don’t see how it can be, and in the end… The money supply grows… Inflation rises… Eventually interest rates rise to levels that hurt. Dollars get cheaper to pay back debt and interest on debt… And… Our purchasing power gets reduced over and over again.

Other central banks around the world have announced that they WILL NOT follow the Paulson-Bernanke model of creating the RTC-like institution to buy bad debt. Do they know something that our lawmakers should know before they make a decision? I think they do.

Someone asked me yesterday, why I said that the Canadian dollar/loonie (CAD) would most likely be capped around parity to the green/peachback. Well… That’s not set in stone. I was simply going back to the last time the loonie hit parity, and watched the government and central bank freak out! These two made sure that parity didn’t last too long, by talking down the economy, reducing interest rates, etc.

But, these two institutions had better watch out; economic growth is stronger in Canada, and yesterday we saw Canada’s latest inflation report tick higher. Canada’s all-items inflation rate was 3.5% in August – in line with market forecasts and the highest since March 2003. The inflation rate edged up from 3.4% in July. Canada’s headline inflation rate was above the 3% target in August for the third month running… Think maybe that the Bank of Canada is re-thinking their decision to cut rates in step with the U.S. Federal Reserve last year? Nah… They’ll give you 10 reasons from Sunday why those rate cuts were needed… But, now I’m saying that there are a few reasons to raise them again!

You know… Since the middle of July, the Aussie dollar (AUD) has been taken to the woodshed, and only in the past week has it recovered a bit, gaining back 6% of its move down from 98-cents to 78-cents. I was dragged through the coals by a few people that said I misled them into believing the Aussie dollar would reach parity… Well, it got to 98-cents! But… Now I read an article that says that Citigroup is advising their clients to buy Aussie dollars once again, and once again they believe it will reach parity to the dollar. “The Aussie stands out as the currency within the majors that potentially has the greatest benefit. We still believe we are likely to see the Aussie get to parity.” said, Tom Fitzpatrick, at Citgroup Global Markets, Inc.

So… On that note… I’ll head to the Big Finish!

Currencies today 9/24/08: A$ .8380, kiwi .6845, C$ .9655, euro 1.4665, sterling 1.8550, Swiss .9190, ISK 95.11, rand 8.1750, krone 5.6150, SEK 6.58, forint 164.20, zloty 2.2660, koruna 16.57, yen 106.10, baht 33.95, sing 1.4220, HKD 7.7610, INR 45.96, China 6.8230, pesos 10.73, BRL 1.8460, dollar index 76.78, Oil $109.15, Silver $13.30, and Gold… $888.19

That’s it for today… I received two wonderful gifts yesterday… A beautiful flowered plant and an incredible edible fruit basket in recognition of me becoming a “Cancer Survivor”. That was very nice of the senders to do that! The kids on the desk ate up that fruit like it was going out of style! I told an audience last week that I preferred to be called a “Cancer Beater” … Like I said though, the cancer wolf is always at the door, so I had better be careful. And thank you all once again for all your notes, and especially those that send along tips that have helped them after beating cancer. Today, is the newest member of the St. Louis Soccer Hall of Fame (along with our Ty Keough), Don Ries’ birthday! I missed the induction ceremony last Friday night for these two ambassadors of St. Louis Soccer; but it sounded like a good time was had by all! Time to go… Hope your Wednesday is Wonderful!

Chuck Butler
September 24, 2008