Banks Have Gone “Cold Turkey” on the Cocaine of TARP

The daily noise has the bias to buy going toward the dollar this morning… For some unknown reason – and I emphasize this here – the markets are not listening to Big Ben Bernanke, when he says that current near-zero interest rates will remain for “some time”… You see, the markets are under the impression that he’s giving us a head fake, and will raise rates aggressively very soon, for the data that has printed recently is of the “need to raise interest rates before inflation takes the economy hostage” kind of stuff…

So… Somehow, the markets don’t believe the Fed Chairman… Now, I can’t imagine why they wouldn’t believe him, can you? HAHAHA! Of course I can, and so can you! He’s made a mockery of central banking! But shoot, like the old Hank Williams, Jr. song goes… It’s a family tradition! The previous Fed Chairman, Big Al Greenspan, was just as bad, if not worse! He primed the pump, and Bernanke is doing the pumping!

OK, I digress… Somehow, I see this all ending this week, at least for a while… You see, tomorrow, the FOMC will meet, and I think Big Ben will take that opportunity to stress that not only has the Fed kept rates unchanged, but that they will continue to do so… I just don’t see Big Ben validating the markets’ belief that rates will be going up aggressively very soon…

Now… Here’s the tale of two cities… First, I personally think that interest rates should never have gone to near zero… I made this case a couple of years ago, so for you new readers, don’ think I’m doing this in hindsight… I would have hiked rates long before now… But that’s just me.

On the other side of the coin, I personally hold to the thought that the US economy will do a double dip, and I think Big Ben sees that chance too… So he’s not going to raise rates now, only to look more like a fool when he has to cut them again.

OK… So… What’s the damage to this whole “interest rate hike thought process” by the markets this morning? Well, the euro (EUR) has fallen back to the 1.45 handle, and wasn’t given any room to breathe this morning, after German Investor Confidence slipped back to a 50.4 figure from the previous month’s 51.1 figure. The report actually was better than forecast (50), but… The slippage, helped euro investors decide to go ahead and take profits.

The other thing weighing on the single unit this morning (aside from Austria’s takeover of Hypo Bank) is the never-ending stream of “Armageddon” reports regarding Greece’s debt position… I had a conversation with one of my fave economists last night regarding this situation… And again, just like the Dubai thing, I keep coming back to California, New York, Illinois, and other states here in the US that have debt problems that are just as bad or worse than Greece… Or Spain… Or Ireland… Therefore, if the media outlets were doing their jobs correctly when reporting the Greek problems, they would say something like, “but here in the US the world’s 8th largest GDP resides in the state of California, and in California, the debt problems are far worse, which makes this a more dire situation, given the size of California!”

But I’m just dreaming there… So… I go on…

In Australia last night… The markets got shaken (not stirred) a bit with the release of the Reserve Bank of Australia’s (RBA) last meeting minutes, which showed that “they could consider a pause at the following meeting.”

So… Now we have the tale of two central banks… The RBA’s minutes were taken as dovish… What will the Fed say following their meeting tomorrow? If the Fed’s statements are more upbeat than the RBA’s, the Aussie dollar (AUD) could suffer… I personally don’t see that happening, but… You never know!

The Japanese yen (JPY) is weaker overnight too, which is opposite from what has happened any time the dollar has rallied in the past year… I think that all the talk of the Fed moving to aggressive rate hiking has squelched the dollar carry trades, and probably pushed them to the Japanese yen, where there hasn’t been any sign to raise rates since… Well, come to think of it, my youngest son is 14, and the Japanese have not raise rates in his lifetime!

So… Do you remember the carry trade? Well, it was a risk trade that involved selling a low yielding currency to buy a high yielding asset. The currency that was sold was the “funding currency”… This was huge before the financial meltdown of August 2008. Earlier this year, the dollar replaced the yen as the funding currency, for the dollar was losing ground fast, and yen was gaining ground. If the funding currency is losing value, then it makes the trade even more profitable, as the person that sold the currency short can buy it back to unwind the trade at a cheaper level!

But, all this talk of the Fed moving on rates soon, has scared the bejeebers out of the dollar carry trade folks, and… They have, it appears to me, unwound them in favor of yen carry trades once again… That means, the dollar gets bought to unwind the trades, and yen gets sold.

This is what it looks like to me, folks… I could very well be way off base here, but I’ve got my eye on the pitcher, and don’t think I’ll get picked off here!

Hey! Have you noticed the financial institutions lining up to repay the TARP money they took from the government? Citicorp and Wells Fargo so far, and there will be more… These financial institutions have gone “cold turkey” on the cocaine of TARP! The government was akin to the drug dealer, holding out the cash for these institutions at very low rates of interest, and once they institution took the “cocaine” they found out that it came with strings attached… Drug dealer/government intervention is how their institution would run!

So… These institutions are going “cold turkey” and giving up the “cocaine”…

And.. The fact that they can do that is what makes me so darn angry! If the government hadn’t just held out the drug for them in the first place, maybe these institutions would have figured out how to survive without the drug! But nooooooooo! The government made it too easy for them to take the drug, and make it all better, without the pain!

OK… I’m not going to carry on with this… Just thought it was interesting… And I just love the fact that Treasury Secretary Geithner says now that the $700 billion financial bailout will end up costing taxpayers “no more than $140 billion.” HEY TIMMY! IF IT COST TAXPAYERS $1 IT WAS TOO MUCH, YOU DOLT!

Besides… That $700 billion bailout package was suppose to keep unemployment at 8.5%… Hmmm… So, taxpayers paid $140 billion for nothing! Unemployment, if calculated correctly, is around 17%!

OH! And speaking of wasted days and wasted nights, along with wasted money… I read a story on the Bloomie this morning that says that Fannie and Freddie’s federal regulator is renegotiating the companies’ financing plan with the US Treasury Department and may seek an increase to their $400 billion federal lifeline before the end of the year.

So… Here’s another thing that just gets me all ticked off… The government took over Fannie Mae (FNM) and Freddie Mac (FRE)… And they’ve already run through a good portion of their $400 billion “back up” money… So, it’s just another example of how “well” the government runs things…

And that brings me to this… This past Sunday, the US Senate voted to pass a government funding bill that pumps $1.1 trillion into the government… Now… Haven’t I screamed and yelled enough about our national debt? Are these guys trying to see if they can make my heart explode? And get this… There will be all kinds of pork added to this bill before it gets the final stamp of approval.

So… Why is it that American people aren’t storming the streets with their pitchforks and rakes, and chasing their Senators down the streets? This is nothing more than more deficit spending that just increases the chances of this country going belly-up in the future… Is that what you want for your grandkids?

I shake my head in disgust… I really do…

So, in the end, folks, it goes like this… There may be dollar rallies, there may be times when everything is coming up roses for the dollar… But in the end, when the music stops, there won’t be a chair for the dollar to sit on… So don’t let this “noise” cause you to lose your focus on the horizon, and the long-term slippery slide the dollar will be on some day…

Last week I spoke at the Plan B Conference here in St. Louis. I was talking about gold and heard a quote by my old friend, Jon Nadler, that I just had to relay… It was that if you’re buying gold for the right reason, then there’s no wrong time to buy it. I explained it like this… If you’re buying gold because your neighbor down the street said he bought it and made a 20% profit in a week, then that’s the wrong reason… But, if you’re buying it as a diversification tool for your investment portfolio to provide insurance against dollar depreciation, inflation, deflation, and uncertainty in the world… That’s the right reason!

To recap… The dollar is stronger this morning on thoughts that the Fed will go on an aggressive rate hike campaign shortly, due to recent economic data. Bernanke could throw cold water on those thoughts at the FOMC tomorrow. The euro has a number of things weighing heavily on it this morning, but has shown resiliency in dealing with these items, and it looks like the carry trade is getting shifted from a dollar carry trade to a yen carry trade once again.

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

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