NightBlogger

Chuck Butler
The Daily Reckoning
The Bloomie is reporting this morning that “finance officials form the U.S., Japan and Europe, in mid-march drew up plans to strengthen the dollar following troubles at Bear Stearns.” The story which originally appeared in Nikkei English News went on to report, “the intervention designed by the U.S. Treasury Dept., Japan’s Finance Ministry and the European Central Bank, called for the central banks to purchase dollars and sell euros and yen, with Japan providing the yen needed for the currency swap if the greenback’s value dropped significantly.” The three groups, which considered making an emergency statement through G-7, did not stipulate a specific exchange rate for the potential intervention, nor did they detail the amount of money to be used.

So… Now we know! There was no way the dollar turned on a dime like that without something like this happening. The fundamentals are so anti-dollar strength, and yet the dollar was gaining strength. Well, we know that the Bank of Japan has a treasure chest of yen that they have collected over the years… And they have an even bigger treasure chest of dollars (most of it held in dollar denominated Treasuries), but now they have even more dollars! I bet they are just happy as pigs in slop to own all these dollars!

OK… What’s going on today with the currencies? Oh! That’s what this is all about, eh? The currencies, led by the euro (EUR), have rebounded nicely the past two days, with only a brief sell-off yesterday morning after the industrial production number printed. I think the markets got that out of the system and went back to the speech by ECB member, Weber, yesterday. Recall, that Weber said that there was “no scope for interest rate cuts”. Keeping that in mind, the distinct interest rate differential between the euro and the dollar came back into play, and thus a euro rally began, and continued overnight and through the early part of the European session. More

The European Central Bank has issued the clearest warning to date that it cannot serve as a perpetual crutch for lenders caught off-guard by the severity of the credit crunch. Not Wellink, the Dutch central bank chief and a major figure on the ECB council, said that banks were becoming addicted to the liquidity window in Frankfurt and were putting the authorities in an invidious position. “There is a limit how long you can do this. There is a point where you take over the market,” he told Het Finacieele Dagblad, the Dutch financial daily. “If we see banks becoming very dependent on central banks, then we must push them to tap other sources of funding,” he said.

While he did not name the chief culprits, there are growing concerns about the scale of ECB borrowing by small Spanish lenders and ‘cajas’ with heavy exposed to the country’s property crash. Dutch banks have also been hungry clients at the ECB window. More

It Is Time
The Automatic Earth
The main development in financial markets in the past 6 months, bar none, has been the accelerated influx of taxpayers’ money into the US and EU economies, in an alleged but highly suspect attempt to “save” financial markets. Today, August 21 2008, marks another such watershed moment that I simply have to call. A number of developments come together to mark the moment.. I think I first realized it fully when Fannie Mae and Freddie Mac share prices were rising this morning. There is no reason for that, and it won’t last. But it does shine a blindingly clear light on other things: Their shares went up because everything else is worse.

The main development may be that foreigners are no longer willing to buy US debt paper, at least not in the way they have until now. Lehman, one of the oldest, best connected and largest US investment banks, until recently, tried to sell 50% of itself to foreign funds. They refused to buy. 6 months ago, it would have been unthinkable to offer 50% of such an institution to a Chinese fund. Congress would have forbidden it. Today, there’s no such protest. Just a “Thanks, but No, Thanks” from the Chinese. Moreover, there’s a avalanche of reports on the desperate situation at the other investments giants, Goldman Sachs and Morgan Stanley. Waiting in the wings are the commercial banks, with Citigroup teetering toward oblivion.

Fannie and Freddie are long beyond salvation; the only reason they haven’t been liquidated to date is politics, the same kind that allows Ford and General Motors to pose as going concerns. But neither Washington nor the Federal Reserve could possibly save the US financial system anymore, even if they wanted to, something I question. The number of institutions being hurled into the black abyss is increasing so fast, they wouldn’t know where to start anymore. The game in town is saving the Hampton estates and the Learjets with tax revenue funds. It’s a game the market makers are good at. The only consolation for the US is that the entire planet is incredibly shrinking into a credit crunch the likes of which nobody’s ever even dreamed of.

Mark Faber claims Asian current account surpluses (and I’d add: holdings of foreign debt) will lose 50% of their value in the next few months, and I think he’s dead on (though I doubt it’ll boost the US dollar). Also, the European Central Bank can’t prop up EU banks any longer, and that will turn ugly, especially in Spain where Don Quixote is set to meet Franco in Guernica. What has changed recently, and certainly today, is that the respected media now start saying the same things I’ve been warning about for a long time. So the only consolation for me is that I’ve been right about it all, and all along.

DailyReckoning.com
Not one but three different banks are warning investors of major crisis ahead. Note to the banks: where have you been for the last year? A thousand martini lunch? The slow-motion credit crisis is nearly twelve months old. The question today is whether the competing interest rate policies of the European Central Bank and the U.S. Federal Reserve will lead to more selling in global stock markets and higher commodity prices. Inflation is winning the war.

“A very nasty period is soon to be upon us - be prepared,” says Royal Bank of Scotland’s chief credit strategist Bob Junjuah. In Wednesday’s U.K. Telegraph Junjuah says, “The Fed is in panic mode… The massive credibility chasms down which the Fed and maybe even the European Central Bank will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets.” Aussie stocks are caught in the thematic cross fire. Higher commodity prices are good for commodity producers. But global inflation sows the seeds of global recession, which is not bullish for resources.

Morgan Stanley’s European research team says an European Central Bank rate hike next month (the one Jean Claude Trichet has threatened to deliver) could lead to a “catastrophic event.” Morgan’s report concluded that, “We see striking similarities between the transatlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe.” More

By Ambrose Evans-Pritchard, International Business Editor
The clash between the European Central Bank and the US Federal Reserve over monetary strategy is causing serious strains in the global financial system and could lead to a replay of Europe’s exchange rate crisis in the 1990s, a team of bankers has warned. “We see striking similarities between the transatlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe,” said a report by Morgan Stanley’s European experts.

Just as then, Washington has slashed rates to bail out the banks and prevent an economic hard-landing, while Frankfurt has stuck to its hawkish line - ignoring angry protests from politicians and squeals of pain from Europe’s export industry. Indeed, the ECB has let the de facto interest rate - Euribor - rise by over 100 basis points since the credit crisis began. More