When Will Foreigners Say, "No Mas"?

Good day… And a Terrific Tuesday to you! I trust your weekend was grand. I was lucky enough to have a 3-day weekend, and brother did I need one! Rest was the order of the weekend! Of course Saturday was Valentine’s Day… Here’s a thought for all us men that were standing in line at the flower shop… We need a “Hallmark holiday” where our significant others buy us tickets to baseball games! HAHAHAHAHAHAHA!

OK… Well, Friday ended on a sour note for the currencies, and while yesterday was a holiday here in the U.S. the currencies continued to sell off, with the dollar swinging a mighty hammer. G-7 said very little about currencies, left yen alone, and praised the Chinese for their continued move toward flexibility of the renminbi…

Now, if you think like me, no wait, most people don’t want that burden! But… We think in similar circles, you probably chuckled a bit when you heard that G-7 “praised” China for their continued flexibility with the renminbi… Doesn’t that almost sound like an Eddie Haskell? “Why, Mrs. Cleaver, you sure look nice today” Is G-7 “kissing up” to China? It sure sounded that way to me, for China hasn’t allowed the renminbi to move higher VS the dollar with any kind of consistency for some time now!

So, G-7, Schmee 7! I just don’t think they can deal with these things in a macro environment… In other words, each finance minister, Treasury Sec. or other official needs to go home and take care of their own house!  There was one thing that came out of the G-7 meeting… Each country “promised” to not resort to protectionism to help their economy… I’m sure that while they promised they had their fingers crossed behind their respective backs!

The shot across the euro’s bow this time is coming from the rot on the vine of the Eastern European countries… These Eastern European countries are taking on water from bad loans, or loans gone bad, and you know who the lender of last resort is on these loans don’t you? Yes, Eurozone banks… This opens a whole new can of worms folks… The euro has taken hits from Spain, Italy, and Italy in this round, and previously took a major hit from France in 2005, and survived all of them. And it will survive this round… But not until it sees more weakness VS the dollar. I would look for the euro to revisit its previous low of a few months ago in the 1.23 handle… This could get ugly, as this Eastern European bad loans scenario has just popped up, and we’ve got to work through all the rubble to get to a base, before the euro can come back even stronger.

This will obviously represent some cheaper levels to buy, and diversify… Or average cost in… Or anything other reason you might have for taking advantage of this soon to be cheaper opportunity.

So, with the Big Dog, euro getting taken to the woodshed for its indiscretions with Eastern European loans… BUT REMEMBER I TOLD YOU THIS… The European bank losses are NOTHING compared to those in the U.S. My friend, John Mauldin, said that they “Dwarf those in the U.S.” And… Remember, The Eurozone began this meltdown in a position of strength! The U.S. was on its knees begging for foreign investment to finance their IOU’s… The rest of the dog pound is getting taken to the woodshed too! Shoot Rudy, even Japanese yen, which didn’t get mentioned by G-7 for its strength, is losing ground to the dollar this morning. There’s not a currency anywhere on the scorecard that’s not going 0-for 4 against the dollar today… UGH!

OK… I take that back! Not a fiat currency that is! But the currency that a lot of people don’t consider a currency, but I do, Gold… Is kicking some dollar rear this morning and taking names later! Gold is up $24 this morning to $965! And why do you think Gold is on the rally tracks this morning? Well… Things are uncertain these days aren’t they? Then if you answered yes, then you know that the “uncertainty Hedge” is here to save the day! Gold is the “uncertainty Hedge” … Oh, and Silver is like the Super hero’s sidekick… Like Robin to Batman, Silver to Gold… Silver is trading within spittin’ distance of $14…

When will traders and risk takers stop and look at all the debt the U.S. is taking on? That’s the question I keep asking myself… The massive amount of debt that just keeps going on the books, is crazy stuff folks… It’s gotten to be so massive, that I believe it has pushed everyone to become “comfortably numb”  That’s got to be the answer, because if it isn’t, then I think we would see people screaming bloody murder at the Gov’t! They are amassing these massive debts and we’re paying for it! Don’t believe me? Well… Let’s listen to former U.S. Treasury Sec. Paul O’Neil, who quit because he didn’t believe in the tax cuts without cuts in Government spending… “The federal government doesn’t have any money that it doesn’t first take away from the people.”

But, as long as no one complains to their Senators, and Representatives, then they believe they have Carte Blanche to spend your money, your kids’ money, and your grandchildren’s money… Sometime in the future, someone will find a year’s worth of these Pfennig’s, and they’ll say… “Hey! Why didn’t we listen to this guy?” OK, I’ve gone too far there… That’s crazy imaginary stuff there, and has no place in this “professional letter” HAHAHAHAHA!

Well, we get a look at the how well the foreigners are keeping up with the financing of these debts this morning, as the December TIC Flows will print. Keep in mind that this is a fancy name for simply stating that this is the “net security purchases by foreigners”… Also, keep in mind that we need about $40 Billion per month (yes, it has fallen, but that’s long before we calculate the budget deficits that will be mounting this year)… In November the net was a negative of $21 Billion… Whoa! December’s total is forecast to be a positive $20 Billion… Which is better than a negative $21 Billion, but still doesn’t meet the required amount to finance the deficit… So, we just keep pushing that forward, and forward, and forward, until someone “calls” us on it, much like De Gaul called the U.S. on the debt, back in 1971, and demanded to be paid in Gold for the IOU’s he held… So… Now, we wait for the time when foreigners say “no mas”… And you now see why this is not a good idea for a country to be at the mercy of outsiders…

That’s when Nixon closed the Gold window… August 1971… And the world that we knew with a Gold standard was to be no more… Sort of like Puff the Magic Dragon when Jackie Paper came no more, and Puff that mighty dragon, he ceased his fearless roar!

Ok… Enough of that! The Japanese Finance Minister Nakagawa, is going to resign after Japan posted an economic report that showed Japan’s economy contracted at the its fastest pace in almost 35 years during the 4th QTR of 2008. Of course it didn’t help that he was reported to have been under the influence of alcohol during the G-7 meeting… He denied that his behavior was due to “being drunk”, and instead blamed a combination of alcohol and cold medicine…

So… Not only did Nagakawa have to deal with the bad economic report upon returning home, he had the press all over him about his behavior… So, he announced that he will resign… In Japan, this is called, falling on a sword…

The economic report has caused some slippage in the Japanese yen. This is the first real slippage we’ve seen in yen in some time… There are no reports of intervention by the Bank of Japan and the finance ministry, so one has to believe that this is simply profit taking after seeing the rot on the economic performance’s vine…

But, as long as the Bank of Japan and finance ministry keeps their finger off the intervention trigger, Yen should not succumb to heavy selling, and losses VS the dollar… Not yet…

The “new and improved” $787 Billion Stimulus Bill is on the President’s desk for his signature today… The markets will get all tingly, especially stocks… So, let’s hope for at least a day or two, the connection between stocks and currencies remains… But it can drop soon after, and go back to the way things have always been!

I see the time, and realize that I’ve been typing for far too long this morning, I have a ton of stuff to do, since yesterday was a holiday, so off to the Big Finish we go!

Currencies today 2/17/09: A$ .6405, kiwi .51, C$ .7920, euro 1.2640, sterling 1.4260, Swiss .8550, rand 10.20, krone 6.99, SEK 8.70, forint 242.30, zloty 3.86, koruna 23.38, yen 91.75, sing 1.5260, HKD 7.7540, INR 49.66, China 6.8414, pesos 14.61, BRL 2.3050, dollar index 87.38, Oil $37.06, Silver $13.96, and Gold… $963.80

That’s it for today… A BIG Happy Birthday to Mike Meyer and Suzy Q. today! These two colleagues share this day so we’ll have lots of food and fun today… Well, not me.. I’ve got work to do! Pitchers and catchers reported to spring training on Saturday… YAHOO! It’s now 3 weeks for me before I report to spring training! And… How about those Missouri Tigers! What a treat to see the basketball team ranked in the TOP TEN once again, after too many years of rebuilding! WOW! Speaking of Mike Meyer, he will be Pfilling in on the Pfennig during the 3rd week of March, as both Chris and I will be on spring vacations with family… My little buddy Alex, is at home sick today, sure hope he keeps it to himself! Hope your Valentine’s Day was grand… Time to go now… I hope your Tuesday is Terrific!

The Daily Reckoning