Aussie CPI Prints Weaker Than Expected

And now… today’s Pfennig for your thoughts…

Good day, and a wonderful Wednesday to you!

Front and center this morning is a nasty reaction of the Aussie dollar (A$) to a weaker inflation report. The A$ has lost nearly 1.5-cents because the first Quarter CPI came in at 1.3% (year on year) vs. the consensus of 1.7%, and traders had a knee jerk reaction to report, thinking that the Reserve Bank of Australia (RBA) will cut rates at their meeting next week. 

Can everyone there just please calm down?  I’m going to go out on a big fat limb here, (so it will hold me, without snapping) and say that I think the RBA will most likely look at this CPI report with some reservations about a quick reaction and cutting rates. It will cause them to reinforce their easing bias, but I don’t believe it will lead to a rate cut next week. And that would allow the A$ to look to recover some of this lost ground.

The currencies overall are mixed again this morning, kiwi is of course selling off in sympathy of the A$ move, but the euro is up a bit, and is back over 1.13 this morning. Pound sterling is stronger again this morning, as the BREXIT talks continue to move to the side of “no exit”. And of course the U.S. President threw his two-cents into the discussion and told the U.K. that they should remain in the European Union. Boy, I could have all kinds of fun with that but the kinder, gentler Chuck, will just let that slide, and move on to other things.

The price of oil has bounced higher after a couple of days of slippage in the price. Yesterday, the initial supply data for oil in the U.S. showing supply dropping. There remains a fear of a supply infusion that could cut this rally to its knees in a heartbeat. But for now, the price of West Texas Intermediate Oil trades with a $45 handle.   

I talked to some people about oil the other day, and told them that the $50 price for oil would be a HUGE hurdle. And who would have thought we would be talking about the price of oil at $50 a few months ago, when it was trading below $30?    The API report on supply that printed yesterday, is a precursor to the official inventory report that will be issued by the Energy Information Administration (EIA) today, so if the API precursor report is any indication of the EIA report will show, the price of oil could very well see another bounce today.

I know that doesn’t make everyone happy, but it does make oil people, investors, and bankers with loans to oil producers happy. And, since the price of oil has held the markets’ attention for so long now, it does play into the weak dollar trend theory. Wait, What? Think about that. I’ve been talking about the end of the strong dollar trend, and when it does finally come to an end, the only thing that can be next is a weak dollar trend.

The anti-dollar assets have been on a run vs. the dollar and that too plays nicely in the sandbox with the end of the strong dollar trend call that I’m making. Oil, gold, and the euro. Speaking of gold, yesterday morning I was very frustrated with the trading in gold, which was seeing selling after booking a $6 gain on Monday. But, as they say, the cream rises to the top, and gold ended the day on Tuesday with a $5.40 gain. Pretty good, considering it was down $6 in early morning trading.

There’s an interesting article on Bloomberg’s website today titled “Sweden Declares Truce In Currency War”.  Hmm… Let’s see what it has to say, eh?

Sweden’s central bank is calling a truce in the currency war.

As policy makers in Stockholm last week announced they would reduce the pace of their quantitative easing program in the second half of this year, they also signaled they are now willing to accept a stronger krona.

Well, the Swedish krona has been one of the beneficiaries of the weaker dollar in the past month. So, it all makes sense, eh?   The Norwegian krone has been held hostage by the price of oil, and the euro at times. The Russian ruble is the poster child for a currency that’s tied to the tracks of the oil train. But Norway plays a close second to Russia in that regard, and so currency holders of rubles, krone, real, and even loonies, will want to see the price of oil reach its next hurdle of $50, which in my opinion would carve in concrete a rally for the price of oil.

Last Sunday’s Pfennig talked about NIRP – Negative Interest Rate Policy. And I’ll borrow a piece of that Pfennig for this letter:

“While the U.S. Federal Reserve is not really considering NIRP at this moment, some Fed members have confirmed we can’t dismiss NIRP entirely in the U.S. just yet. For example, the president of the Federal Reserve Bank of New York, William Dudley, recently explained the Fed’s position on NIRP:  ‘We’re not in a position today that we’re thinking at all seriously of moving to negative interest rates. But I suppose if the economy were to unexpectedly weaken dramatically, and we decided we needed to use a full array of monetary policy tools to provide stimulus, it’s something that we would contemplate as a potential action.’

Former Fed chief Ben Bernanke has also said that, ‘negative rates are something the Fed will and probably should consider,’  in case the economy faces another serious downturn.

That thought has been on my mind since Sunday morning. And then later in the day I received my precious bi-monthly letter: Things That Make You Go Hmmm (TTMYGH) written by the great Grant Williams. And in this letter he rips NIRP up one side and down the other, and in doing so, he mentions that he had lunch with the Great analyst, David Rosenberg who had this to say, “Almost $7 Trillion of Gov’t Bonds globally are trading below zero; 27% of value of outstanding sovereign debt”.

I just can’t get my dog to hunt in those woods folks.  I know to date there hasn’t been anything bad happening in the countries that have implemented NIRP, but does that mean that’s going to go on forever? No, it can’t! Think about this folks. You have consumers of any country, and they are getting taxed for saving and not spending, so the conventional thinking is that these consumers would go out and spend, thus saving the economy. But the opposite has happened. These consumers have decided to save even more to make up for the tax!

Hmmm… the problem with this is that savings rates had fallen in the U.S. to very low levels, and while they’ve corrected, they still have a long ways to go to get back to levels seen 30 years ago. Either they save that much more, or they reduce debt they hold and neither of those options are going to help any economy, much less the U.S. economy that’s so dependent on “consumption”.

I also have borrowed something from Tony Sagami of Connecting The Dots letter that can be found here. So, some of this next piece is me, and some of it is Tony.

I’m feeling quite chatty this morning, so I apologize, but this is important stuff folks so please pay attention to this.  I’ve always told you that all debt isn’t bad. Debt that’s used appropriately and paid back is good debt. Bad debt is debt that’s allowed to grow and never be paid back.

That’s the kind of debt that we have here in the U.S., and not only with the government debt which is growing faster than our GDP, but with corporate debt, and individual debt. Did you know that in March $16.4 billion of corporate loans went bad, and March wasn’t the first month, in fact, March was the fifth consecutive month of defaults greater than $5 billion! OUCH!

Bloomberg ran an article the other day that said that the “Three largest banks in the U.S. – Bank of America, JPMorgan Chase, and Wells Fargo – disclosed that the number of delinquent corporate loans increased by 67% in the first QTR”      JPMorgan’s delinquent corporate loans increased 50% to $2.21 billion. Bank of America’s increased 32% to $1.6 billion, and Wells Fargo’s increased 64% to 3.97 billion.

I do realize that a lot of the defaults have come in the junk bond arena, but let’s not just blame it all on junk bonds. Just last week, Peabody Coal filed for bankruptcy, they certainly weren’t junk! And for anyone wanting to see the proof of this data they can click here for the whole article.

Well, it’s time to visit the U.S. Data Cupboard and see what it has for us today, but first we must review yesterday’s fare, because it was responsible for the turnaround in gold, and the further sinking of the dollar. So, let’s go a little journey back in time to yesterday…

The U.S. Data Cupboard was not kind to the dollar yesterday. I told you yesterday that the first of “real economic data” was to print this week in the form of March Durable Goods Orders. I also told you that I thought it would be negative if it weren’t for some expected aircraft orders. Well, the aircraft orders came, and pushed the data to a positive, but the 0.8% increase in March was not anywhere close to expectations which were around 2%. With this data, I’m still tracking GDP at 0.4% in the first quarter.

In addition, the April reading of Consumer Confidence, which was expected to remain flat, after falling by a large amount in March, fell again from 96.1 to 94.2. Now that’s two months that I don’t have to chastise the people that took the survey, for the last two months have gone the way the index should be going!

So, at what point does the Fed admit they made a mistake in hiking rates in December? I told them not to hike rates. But they didn’t listen, but I’ll betcha a dollar to a Krispy Kreme that they are hearing me now! The economic data, other than the trumped up labor surveys that the BLS puts out monthly, has been awful since the rate hike, and I don’t see it getting any better any time soon. Of course that’s just my opinion and I could be wrong in the end. But I doubt it. And like I said back in December, the Fed wants inflation, but yet, they did something, hike rates, that fights inflation. So, again I ask the question – at what point does the Fed admit they made a mistake in hiking rates in December?

The U.S. Data Cupboard today, has some data prints that aren’t as important as yesterday’s disappointing Durable Goods Orders. Wait a minute, I take that back, because headlining the cupboard today is the EIA Petroleum Status Report I talked about above. What the heck were you thinking Chuck? In addition to the EIA report, we’ll also see the Trade Balance, Pending Home Sales and some other third tier stuff.

And of course I almost forgot because it’s going to be a non-event, but the Fed’s FOMC two-day meeting comes to an end today, and the Fed will announce that they are not changing anything, and that’s it, because as I told you earlier this week, there’s no press conference following the meeting today. And the focus will shift to June’s FOMC meeting. I’m not even going to go there it’s too far out for me to already be telling you that the Fed won’t hike rates then either. No wait! I just did what I said it was too early to do! You dolt, Chuck!

I was going through Ed Steer’s letter quickly this morning, and this article headline caught my eye, so I drilled down to see what it was about. Here’s the title I saw: “Gold Back in Fashion? Why Precious Metal Has Made An Amazing Comeback”   See why it caught my eye? Well, it’s over at sputniknews.com and can be found here, or here’s your snippet:

Gold is coming back into fashion: ‘left for dead’ for almost four years it’s up over 50 percent this year, Manhattan-based financial writer Michael Brush notes. Does it mean the precious metal is ‘back for good’?

So, why has gold caught its second wind?

As Brush and Rickards note, central banks are trying to protect themselves from the U.S. dollar inflation.  But it’s only half the story: some experts believe that there is trouble brewing for global economy.

In late December 2015 Lord Jacob Rothschild warned his investors that market conditions are deteriorating. “So much so that the wind is certainly not behind us; indeed we may well be in the eye of a storm,” Rothschild wrote in an annual RIT Capital Partners’ report.

Indeed, in his recent book ‘The New Case for Gold’ Rickards argues that the world may soon face the international monetary system collapse. According to the economist, the system collapsed three times during the twentieth century – in 1914, 1939 and 1971 – and was teetering on the brink in 1998 and 2008.

The economist (Rickards) drew attention to the fact that each time the system collapsed major economic powers teamed up to write new rules: like it was at Genoa in 1922, in Bretton Woods in 1944 and at the Smithsonian Institution in 1971. An upgrade to the Smithsonian Agreement was made by the Louvre Accord about 30 years ago.

Following Rickards’ logic, we are now at the doorstep of a new upshift.

Perhaps this is why more and more people are turning to physical gold?

Chuck again.  Well, I certainly would like to get some credit for this also, for it was me banging the drum very loudly for a long time about how investors needed to buy physical gold to get the manipulators exposed, and that the global economy can’t continue to juggle all the debt in the world right now.  It wasn’t just James Rickards, although he’s more well-known than I am! I’m just a country boy trying to make some noise in the big city.

That’s it for today. I hope you have a wonderful Wednesday, and be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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