A Case of Too Far, Too Fast

And now… today’s Penning for your thoughts…

Good day, and a Tom terrific Tuesday to you!

There was another mess created overnight in China, as on one hand they posted a $60 billion trade surplus last month, which beat the expectations for a $48 billion surplus, and you would think people would be dancing in the streets, but on the other hand, the strong trade surplus was a direct result of a plunge in imports.

That suggests, no wait, that says, that the Chinese economic slowdown is still in place, and their emphasis on driving domestic demand higher, is not panning out right now. But I have no doubt that domestic demand will grow stronger, eventually.

But what this data tells the markets is that Global Growth is still in the dumps. And what have I been preaching about for so long now that I sound like a broken record, damaged MP3, or a scratched CD?  That the Global Growth currencies of Australia and New Zealand get whacked when this happens.

The Aussie dollar (A$) has been getting a lot of press lately from my guitar playing friend, and investment analyst extraordinaire, Steve Sjuggerud, who pointed out weeks ago that the A$ had plunged to a point that it appeared oversold, and it was hated by investors, and given these things, he thought the A$ was primed to rally. And he was correct.

And even though the A$ is giving back more than 1/2-cent this morning, it is still trading at 73-cents. Just a month ago, the A$ fell below 69-cents.  So, I saw Steve’s latest letter highlighting the A$ trade over the weekend, and he’s still on board with the A$ rallying idea.

As a whole, the dollar seems to be in better shape today, than it was yesterday, when the U.S. Banks and currency trading desks were either closed or skeleton crews manned, which means no new positions taken. So the liquidity was nowhere near the norm, and the volume was down too, which is ripe conditions for a wild swing. And that’s what we had, with the dollar getting sold and the currencies rallying strongly.

But like I said, that seems to be all in the rear view mirror now, with the euro, Chinese renminbi, Swiss franc, and Swedish krona the only major players to be booking gains vs. the dollar this morning. Everything else, including gold, is seeing red!

Did you hear the news that AB-InBev sweetened the pot enough that SAB Miller agreed to the terms at 44 billion pound sterling?  That’s $106 billion in dollar terms, although the terms of the trade will be done in pound sterling.

That, I’m told will be the highlight story for the stock market in the coming days, given the prognostications of a very weak earnings reporting season for U.S. Companies. So, not that I’m even your last choice of someone that looks and acts like a stock jockey, so be careful out there!

The price of oil sure took a hit from last Friday, where it was trading at $50 in the early morning. The International Energy Agency (IEA) who for the past year has been crying wolf about production and supply forecasts, seems to have flipped flopped, and now thinks that with Iranian exports expected to recover, and demand growth slowing, that Global supplies of oil will continue to be oversupplied next year.

Just hearing the IEA flip flop like that, scared the bejeebers out of the oil traders, and this morning, the price of oil is $4 cheaper than it was on Friday.

So, the petrol currencies of Norway, Russia, Canada and Brazil are all backing off their lofty levels of yesterday, but there is a surprise performer this morning, that I mentioned above, and that is the Swedish krona. And why is that? I hear you asking…

Well, Sweden posted their September CPI this morning, and it was stronger than expected, and reversed the previous month’s negative print!  September Swedish inflation rose 0.4%, which beat the expectation of 0.3%, and last month’s -0.2%…  And annualized, Swedish CPI was 1%…   rising from the August figure of 0.8%…

So, inflation is on the rise in Sweden, and that could mean that the Riksbank might leave their monetary policy unchanged, and that has the krona on the rally tracks this morning.

This seems to be the week that Central Bankers around the globe, get out and speak!  We’ll be hearing from Central Bankers every day it seems, and while most, if not all should be ignored, the markets will pick-n-choose which ones they want to focus on.

For instance, this evening Reserve Bank of New Zealand (RBNZ)  Gov. Wheeler, the man who never misses an opportunity to diss kiwi, will speak on “Monetary Policy and Economic Conditions”. Whew! That seems to be a mouthful.

But the thing to take from this, is whether or not Wheeler uses this platform to help the markets manage their expectations for the October 28 RBNZ  meeting. If he would channel his inner Don Brash, he would do just that! But he’s no Don Brash, the former Gov. of the RBNZ, and I don’t think Wheeler even cares.

Well, gold is getting dissed this morning by $10, as I write.  It seems to me that all the assets getting sold this morning, are ones that have recently rallied strongly for consecutive days, and that could very easily be thought of a “too far, too fast” reason they are getting sold this morning.

They had moved “too far, too fast” and now have to go back and fill in the gaps.  That’s an old term that I doubt traders use any longer, but if they do, as least it explains things simply to people, and not all that mumbo-jumbo they use these days, just to attempt to sound like geniuses.

Wanna hear something that’s funny? Well, at least to me it’s funny.  Because of the fact that it’s preposterous.. The GATA folks sent me a note on Friday, and highlighted a story  that appeared in London…

Get this: The London Bullion Market Association (LBMA) in inviting companies to submit proposals on “how to improve the city’s over-the-counter Gold Market”.  Really?  I mean just asking this question tells everyone that the way it is done now is not acceptable. But will they listen and make changes? I doubt it seriously.  So, that’s where the laughter comes in.

Did you see our Sunday Pfennig?  You can go back and read it here. Our metals guru, Tim Smith, did a very thorough review and explanation of the idea that most non-gold buyers have and that is that it will be over for gold once the Fed raises interest rates.

Tim goes back over time since the early 70’s when gold trading became a thing to do. There have been lots of interest rate gyrations since then, even if we haven’t had any in the past 9 years, that doesn’t mean we didn’t have any before 2006. So, go check it out. great stuff!

And speaking of Fed rate hikes. Or better yet, the lack of them… Do you remember when I told you that in the next recession, that the Fed’s quiver was just about out of arrows, and that the arrows that remained were desperate measures? You know, like negative deposit rates. Well, get this: Fed member Dudley decided that now was the time to begin to grease the tracks for negative rates. Let’s listen in:

Some of the experiences in Europe suggest maybe we can use negative interest rates and the costs aren’t as great as you anticipate. So I would think that in a future episode that the Fed would consider it.

So, in other words, in the next recession, you can look for negative interest rates. And if that’s the case, then you might as well, begin to get used to it, because the next recession in just around the corner.

I read this weekend that there’s a group of economists that get asked every month by Bloomberg to estimate the likelihood that the U.S. Economy will go into a recession within a year, and for the past year, they’ve put the odds at 10% (so not much chance, eh?). Well, this month the odds rose to 15%… Still no chance, according to these economists that the U.S. will experience a recession in the next year.

Apparently, these economists had been standing in line for the grand opening of the new IKEA store here in St. Louis, and missed all the recent data that shows the U.S. economy slowing down again.

But, doesn’t the history of all this kind of stuff pique your interests? I mean when you take into consideration that the U.S. tends to have recessions every seven years, and the last recession, (supposedly) ended in 2009.

Do the math… I think even using the new “common core” math, we’re staring right down the barrel of a recession that’s coming. And then it will be a eeny miney mo which monetary policy do I use? Negative rates? Another round of QE? Go all out to weaken the dollar? Choose your poison.

The U.S. Data Cupboard only has the Monthly Budget Balance to print today, so no one besides me will be paying attention. In the U.K. they printed their latest CPI, and it went negative on them at -0.1%… I sure don’t see the Bank of England (BOE) hiking rates any time soon with negative CPI.

Tomorrow’sData Cupboard will have Retail Sales for Sept in the U.S., which I told you last week, the BHI, had indicated to me that this data will be disappointing. And later in the week we’ll see two of my faves, Industrial Production and Capacity Utilization, and once again, I think these two will show the softness of the U.S. economy.

Well, the gold research guru, Koos Jansen was back with more thoughts on Chinese accumulation of physical gold this past weekend and you can find the whole article here. And here are the snippets:

SGE withdrawals in 2015 are stronger than ever. Although, SGE withdrawals are (seemingly) less correlated to Chinese gold import this year, nonetheless Chinese gold import in the first six months of 2015 was higher relative to the same periods in the years before.

I started reporting on SGE withdrawals in 2013 because I noticed these numbers exactly equaled Chinese gold demand as disclosed in the China Gold Association (CGA) Yearbooks 2007 until 2011. In addition, the structure of the Chinese gold market appeared to be designed to direct all Chinese gold supply through the SGE. Therefore, what comes out of the SGE (withdrawals) must equal total supply, which must equal total (wholesale) demand.

SGE withdrawals equal domestic mine output plus recycled gold supply plus import. Therefore, by using withdrawal data from the SGE, Chinese domestic mine output figures from the CGA and estimate the amount of recycled gold supply, we could calculate import.

Chuck again. I think it’s always important to have someone explain his method of coming to conclusions. Oh, and for those of you keeping score at home, Koos Jansen believes that China’s 1st Half of 2015 gold imports are equal to 672.3 tonnes. That’s even greater than last year’s number! WOW! Annualized, that would put Chinese gold imports at 1,346 tonnes.

That’s it for today. Time to go, I hope you have a Tom terrific Tuesday!

Regards,

Chuck Butler
for The Daily Reckoning

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