Bazooka Mario

And now… today’s Pfennig for your thoughts…

Good day, and a happy Friday to one and all!

Front and center this morning we have to talk about the European Central Bank (ECB) meeting yesterday. You won’t believe what I’m about to tell you happened, but it did, so let’s go to the tape!

Remember Bazooka Joe? When I was a young man, I loved Bazooka bubble gum! And the comics that wrapped around the gum were priceless! I was reminded of Bazooka Joe yesterday, when I heard what European Central Bank (ECB) President, Draghi had announced on Thursday. I guess from now on we can call him Bazooka Mario! Because he sure used a Bazooka to deliver his monetary policy yesterday, refusing to wait any longer for previous stimulus measures to take hold. It’s a shame what these Central Bankers will resort to these days, but they do, and now I have to go through all this malarkey.

Bazooka Mario first announced that he was cutting their internal rate from 0.50% to 0%. Then he announced that he was going deeper into negative rates for Bank deposits from -0.30 to -.40%. And then the knockout blow came from the announcement that he was going to increase their Quantitative Easing/bond buying to 80 billion euros each month. But that’s not all! Before stepping away from the podium, Bazooka Mario had one more shot, and that was that the ECB would now accept corporate bonds, in addition to their already approved government bonds.

Whew! I’m worn out just talking about all that hocus-pocus that the ECB and Bazooka Mario (don’t worry I won’t keep calling him that after today) had for us to digest yesterday. I call it hocus-pocus because it has about as much chance to stimulate an economy as I do becoming invisible! Just ask Japan, because they’ve been attempting to jump start their economy for over two decades. And then look at the U.S. – they didn’t hike rates for nearly a decade, they did three rounds of bond buying, and had a near zero interest rate policy for longer than most would have thought. Wasn’t it Albert Einstein that said, “the definition of insanity is doing the same thing over and over again and expecting a different result.”?

Needless to say, the euro got whacked and whacked good, which was deserved, considering what the euro’s Central Bank, the people that are supposed to be the euro’s protector, did to it yesterday. But, and I must make that a Big But, all those losses were reversed and the euro went on a rampage!

What, what? How could that be? The ECB and Bazooka Mario just threw the euro under a bus moving at high speed, and yet the euro surges higher? Well, bust my buttons! Fundamentals thrown out the window, let’s just trade from the seat of our pants from here on out, eh?  I just don’t get it. But, I’m not going to fight city hall here. The euro hasn’t seen the up-side of 1.11 in a month. The last time the euro got the wild haired idea to climb higher, Bazooka Mario threw it under a bus, but now the euro is climbing again, hat will Bazooka Mario do next?

When the dust settled yesterday afternoon, the euro had climbed 3.7% to 1.1219 in one day! But then profit taking, Hey! Who can blame them?, set in.. and the euro began to give back its gains, falling all the way back to 1.1105, where it trades as I write. You know, a thought just crossed my fogged brain. Maybe euro traders looked at the Bazooka monetary policy as a last gasp effort by the ECB, and that there would be no more stimulus measures implemented, which would mean they could look forward, and that’s what got them buying euros and running the price up 3.7% on the day. Maybe, just maybe, but I like the seat of their pants trading description much better.

So, now we have one down and one to go. Next Wednesday, the Fed’s FOMC will meet. What will they do, what will they do? Does this throwing everything including the kitchen sink at the Eurozone economy by the ECB, tell the Fed that the Global economy is so week that the Fed had better not hike rates next week? Hmmm… Good question. The Fed Funds Futures still have a 0% chance of a rate hike next week priced in. 

That’s pretty telling, right? But. I’m still of the opinion that the Fed is not going to be swayed by the weak economic data coming not only from around the world, but also here at home, and will step up and hike rates next week.

If they do that, it will drive a HUGE divide between the U.S. and the Eurozone, and it should. I repeat should, but doesn’t necessarily mean it will, see the euro lose a large chuck of its value. But, then, given the events of yesterday, fundamentals have been thrown out the window, so who knows?

So, out with the safe-havens yesterday! Go on, get out the door, and don’t come back, is how the so-called safe havens were treated yesterday and overnight.  Yen’s fairy tale recovery has bit the dust, gold is on the losing end of trading again this morning, and the 10-year U.S. Treasury has lost a ton, seeing yields rise from 1.86% to 1.95% (remember in bonds, as the yield rises, the price of the bond goes down, and vice versa)  And the dollar got whacked vs. the euro.

And that feeling of not needing the so-called safe havens has carried over to this morning, as the Chinese allowed the renminbi to appreciate at the largest one-day appreciation rate in four months. So, this morning, the currencies are mixed again, with the Chinese renminbi being the best performer overnight, and the Russian ruble right behind the renminbi. The large appreciation of the renminbi has allowed the antipodeans to rally too this morning, with the New Zealand dollar/kiwi trying to put the rate cut in its rear view mirror.

The price of oil has climbed another run of the ladder and trades this morning with a $38 handle. And the Petrol Currencies of: Canada, Russia, Mexico and Brazil are all taking advantage of this latest step higher for oil. Absent is the Norwegian Krone, UGH! The krone just can’t seem to catch a break, when it comes to trading alongside the price of oil. In fact, I would think, just by the look of things that the krone has become tied more to the euro than to oil.

Just an observance, and if I had a trusty assistant, they could do some research for me, and put it on some fancy graphs to either prove or disprove what I just said. HA!

The S. African rand is also up there at the top of the list of best performers this morning. I find this to be more of a move that plays alongside the Russian Ruble and Brazilian real, because S. Africa printed some really weak factory orders and output data yesterday for January, and wouldn’t warrant this kind of positive reaction in the currency if it were just based on the data!

Well, I told you above that the so-called safe havens were shown the door yesterday, and that includes gold. UGH!  But I’m going to focus on silver this morning. A Bloomberg article on silver, caught my attention this morning, so I’ll make the silver people happy this morning! I’m actually both, being a gold and silver kind of guy. And you wouldn’t believe the emails I get asking me why I don’t like silver, because all I talk about is gold. Well, strap yourself in, here goes some thoughts on silver!

Silver hasn’t been so cheap relative to gold for more than 7 years, and with mine supplies forecast to contract this year, that may be a sign it’s ready to come out of the yellow metal’s shadow. Mine production of Silver will probably drop in 2016 for the first time in over a decade and demand is set to outstrip supply for a fourth straight year. Silver’s 12% advance this year has trailed Gold’s 20% surge as financial turmoil and worries about a global slowdown sent investors to Gold as a safe haven. An ounce of Gold bought 83 ounces of Silver last month, more than any time since the financial crisis of 2008. That’s a signal to some that Silver is relatively undervalued and will narrow the gap.  – Bloomberg

The U.S. Data Cupboard is basically bare again today, with only reports on Import Prices on the docket. I misread the calendar yesterday morning, and thought the February Retail Sales would print today, but that’s set for next Tuesday, the 15th! How could I misread that? Hey! The numbers are small, the sun was in my eye, I tripped on rock, and a bug flew in my ear!  No harm, no foul, here, Chuck, just move along before somebody gets hurt!

For What It’s Worth. Yesterday I highlighted the liquidity crunch in the new 10-year Treasury, and about two years ago, I began talking about a liquidity crisis that would occur in bonds. You see, I saw Central Banks around the world buying bonds by the bushel full, and leaving just scraps for bond traders and buyers to deal with. Well there have been some signs lately that the liquidity crisis is nearing.

I told you about the Mr. “X” who told Jim Rickards that bond liquidity is already a problem, and that big deals that used to get done in minutes now takes days and even weeks to complete. So, when I see an article on Zerohedge.com about the liquidity problem, I just have to grab it for you. Here’s the link to the whole article, and here’s the snippet:

The last time that global liquidity conditions contracted at this pace was March 2008 (right as stocks dead-cat-bounced on the back of The Fed’s guarantee of Bear Stearns’ sale to JPMorgan). and things escalated rather quickly thereafter.

Liquidity conditions also contracted (though not as severely as the current conditions) in Dec 2011. which prompted Bernanke to unleash QE2.

Most worryingly – if it wasn’t already obvious, given the world’s stock markets’ total and utter devotion and dependence on central bank-provided liquidity – we have seen this pattern before.

Chuck again. I think the charts that the article has on the web page I gave you the link for above, illustrate this problem much better than anyone can explain it. But it’s here folks, the liquidity crunch is here, and from here on out, things are going to get worse. Uh-Oh.

That’s it for today. Have a fantastico Friday, and don’t forget to be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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