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You Know You're in Trouble When…

jhaddock (March 4, 2009)

Also In Today’s Letter…

Chuck Butler Image

By Chuck Butler My beautiful bride is getting ready to leave this morning. I’m not used to “talking” to someone when I get up at my usual early hour! She’ll be gone in a few, as I write, and then it will be my little buddy, Alex, and yours truly on our own for five days! Yahoo!

Well, after waxing eloquently yesterday about the prospects for the Aussie economy compared to the rest of the world, the Aussies go and post a contraction in their economic growth. Ugh. That’s what I get for throwing out compliments in this environment…

The Aussie economy shrank in the fourth quarter by .5% vs. the forecast of .2% growth. The news scared the markets into believing the Asian problem will be worse off than previously thought.

But seriously, come on! Australia is STILL doing better than most countries, especially those that I listed in yesterday’s article.

Obama’s Brilliant “Stock Tip”

Oh, and apparently it’s “time to buy stocks,” (if you can believe the President). Yesterday, President Obama made his statement that, “buying stocks may be a good deal.”

So…there you have it! We have an official Obama endorsement.

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In case you missed yesterday’s article, one reader sent me some hate mail because the Obama-bounce never happened. I wonder if that guy will send a similar hate-mail letter to the Prez if stocks continue to melt away. And I suspect they will!

The “Obama bounce” never materialized, and in fact the showing in the first two months has been atrocious! On Jan. 2, 2009, the Dow stood at 9034. Since then, the Dow has seen an overall decline of 25%! I would say that instead of an Obama bounce, we’re getting clear signals that the markets don’t like the President’s “new” direction.

The Meddlers Should Butt Out and Let This Recession Do Its Job

This all plays into what my friend Bill Bonner of the Daily Reckoning, www.dailyreckoning.com calls the “meddlers” getting in there and interfering with what should happen.

Indeed, this SHOULD be a normal process of cleaning out the excesses of the previous boom. This should be a recession. Where some businesses die, and those that remain standing are muchsturdier. In other words, what doesn’t kill you makes you stronger.

ImageI’m going to stop there, otherwise I’ll get a mailbox full of emails telling me that I’m being too “hard on the Beaver” so early in the process. I’m not being “hard on the Beaver” I’m just telling you what’s happening.

The dollar is stronger again this morning, with the Japanese yen pushing back toward 100 again. The euro is looking as though it will not hold on to the 1.25 handle, and everything else is just rotten looking.

Even gold was smacked with another US$10 loss yesterday! I have this feeling regarding gold prices in the past week. Grant you, it’s just a theory, but it’s happened in the past. I’m thinking that as stocks continue to drop in the past week, the big boys and girls are selling the one asset that’s making them a profit (read gold!) and using the proceeds to pay for margin calls.

So, that’s my story and I’m sticking to it!

How Long Is This Strong Dollar Road Anyway?

Readers ask me all the time, “how long will this dollar strength last?” Hmmm… You know, I said some time ago that I believed the dollar strength would vanish by late summer or even early spring. I believed the credit markets might show signs of unlocking by then.

That could bring the risk takers back out from under their respective rocks, and “fundamentals” would return to the markets. That would bring about an end to the dollar strength.

The end of July marks one year of dollar strength, when the you-know-what hit the fan with subprime loans, and this whole lockdown of credit and liquidity caused a huge deleveraging in the markets.

While I still believe this prediction has merit, I also have to take into account the fact that the previous stimulus plans didn’t work, the money was wasted on Wall Street buddies, and cronies.

And now we need another one, but only this new one is centered on the wrong things. So, I’ll be watching for signs that this credit crunch is about to thaw. If none appear, then I’ll have to go back to the drawing board and come back to you with a new projection.

In an environment where “bad news” rewards the dollar, and the “bad news” just keeps coming, then we’re not going to see any signs of a reversal of dollar strength right now.

After all, what used to be called 100-year events now happen almost weekly. You get my drift.

A New Rate Cutting Parade Began Yesterday

The Bank of Canada (BOC) did lower rates yesterday, as expected. The BOC cut 50 BPS down to .50%, just like their neighbors to the south, and talked about “quantitative easing” going forward.

Hmmm…that sounds like their neighbors to the south too! The BOC had to attempt to do something given the fact that the economy contracted by 3.4% in the fourth quarter.

Tomorrow, the European Central Bank (ECB) will meet, and most likely cut rates, after “pausing” at the last meeting. ECB President, Trichet told us after the last meeting that the rate cut had been shifted to the March meeting. So, now it’s March, so expect the ECB to cut rates tomorrow.

The markets have been quite strange with their reactions to easings since this financial meltdown began, and I don’t expect this time to be any different. What I’m talking about here is this environment where markets reward early policy easing with currency strength.

What the Heck is the TALF Again?

In all the “speeches” that were going on yesterday, with Fed Head Lockhart, Fed Chairman Bernanke, and Treasury Sec. Geithner, you would have thought we would have some good sound bites to break down today. But the only truly interesting one was Obama’s stock tip (oh, and watching Bernanke sweat under the AIG questioning was quite amusing as well, but not worth quoting).

On the other hand, Treasury Secretary Geithner did report on TALF, and say that it would begin March 25th. So, I thought I might review what the TALF is for any new readers…Image

TALF stands for Term Asset-Backed Securities Loan Facility. Basically, TALF will expand the Fed’s balance sheet, and if the Fed wants to moderate that expansion, the Fed has to withdraw bank reserves from the system. The Fed usually does this by selling Treasury bills.

I guess the question would be… What happens if the Fed runs out of T-Bills to sell? Hmmmm… I guess we’ll cross that bridge when we get there, eh?

That’s it for today… I have to go upstairs and start some breakfast for my little buddy, Alex, as he’ll be getting up soon, and his first words in the morning are, “I’m hungry”… Spoken like a true teenage boy! I was listening to him play his guitar yesterday, and he’s getting soooooooo good! Writing from home this morning wasn’t that bad, as long time readers know my dislike for writing away from my desk instead of in the saddle at work. I could get used to this… (okay, not really, but we can hope)…

I hope your Wednesday is Wonderful!

Chuck

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