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If I Tried This, I’d Go to Jail

Chuck Butler (June 4, 2009)

Thursday, June 4, 2009

(But It’s Alright If You’re the U.S. Government…)

Also In Today’s Letter…

By Chuck Butler Yesterday was absolutely a “10” on the crazy meter in the currency markets.

As I left you yesterday, traders were starting to dump foreign currencies. It’s easy to see why. Several Asian central bankers were giving the dollar their verbal support as the world’s reserve currency. Yesterday, I told you that South Korea announced the U.S. dollar will always be the world’s reserve currency (later Japan and India joined in the message too).

Right This Way Mr. Geithner…

Now why would they do all say that on the same night?

Enter U.S. Treasury Secretary Geithner’s “Magical Mystery Tour,” (it should be called the “Magical Currency Tour!”). Isn’t is obvious? All the central bankers are throwing their support behind the buck because they were behooved to do so by Geithner!

Well, at least the dollar bulls have someone in their corner! But, the jury is still out on whether or not Geithner’s Magical Currency Tour will last very long. But for yesterday at least, the Magical Currency Tour seemed to work. 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!

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 the lawmakers could do something about a budget deficit train that has already left the station! But the markets did react, and react favorably for the dollar.

As I said, this looks like a coordinated effort to me, folks. They’re trying to pump some life back in the dollar.

Trichet and the Whining EU Babies…

So the Big Dog, the euro, was sent back to the porch, and chained to the porch column. 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 were taken to the woodshed!

The euro recovered a bit overnight, moving back to a 1.42 handle. But once again has given that up, as the European Central Bank (ECB) is meeting as 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 that want, and think they need, Quantitative Easing, along with further rate cuts. In the Red corner, we have Germany’s central bank, the Bundesbank, and they want 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. They’re all 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. What’s it gonna be boy? Spain and Italy or Germany’s Bundesbank that wins this tug-o-war!

RBA Warns the World: You Can’t Slash Rates Too Far…

The Reserve Bank of Australia (RBA), who met earlier this week, kept their interest rates steady as she goes. But they also warned other central banks that cutting rates too low was dangerous. RBA Gov. 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) also met this morning. Frankly, they couldn’t do a lot at that meeting, as they’ve already cut interest rates to the bone, and implemented Quantitative Easing measures. And as expected, 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!

Meanwhile, the news just came out that the ECB just decided to leave rates unchanged too. And they’re buying covered bonds starting next month (i.e. more quantitative easing). I’ll give you the skinny on it tomorrow.

The U.S. Was in the Red in April – Even As Hundreds of Millions of Americans Paid Their Taxes!

The budget Deficit this April was US$20.9 Billion, the first deficit in this “tax-paying” month in 26 years! Can you imagine that? In April when hundreds of millions of Americans pay their taxes, we still recorded a deficit? That’s pretty amazing folks…

April 2009 tax receipts dropped 44% compared with those in April 2008. OK… I also read that tax money is only going to cover half of the fiscal 2009 federal budget. That means the government will have to borrow and print more than US$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”)

Apparently Not Enough…

Tax receipts fell 50% during the Great Depression. Now eight months old, this depression is already rivaling that drop!

Do I have to tell you what’s next? 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 Co (PIMCO), is advising holders of U.S. dollars to diversify before Central Banks and sovereign wealth funds ultimately do the same.

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!”

I just saw some news flash across the TV yesterday that just made my blood pressure rise quickly. Remember when I told you that the government owning banks was a baaaaaaaaaddddddd thing? Recall me telling you how lawmakers would direct banks 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!

That’s it for today… A wild day yesterday, let’s hope for some semblance of calm today! I forgot to tell you yesterday about my time with my beautiful granddaughter on Tuesday night. She and I sang “you are my sunshine” together. Just like her momma used to do when she was a little girl. I would pull out my guitar, and Dawn would immediately want to sing with me. She liked “sunshine,” but her favorite was an old Hank Williams song, Hey Good Lookin’! Sappy stuff, I know… But after all the hootin’ and hollerin’ I do about things, this is the stuff I do when I get home. No one there wants to hear me talk about this stuff, as they’ve heard it for years. And the neighbors? They all change the subject as fast as lightening! So my dear readers get all my thoughts, aren’t you lucky? Ha ha!

Gotta go… I hope your Thursday is Tub Thumpin’!
Chuck Butler

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