Fed Acknowledges Global Market Turmoil

And now… today’s Pfennig for your thoughts…

Good day, and a tub thumpin’ Thursday to you!

Well, the day yesterday was dominated by the Fed’s FOMC Meeting, so we might as well, start there today. The Fed left interest rates unchanged, as everyone thought they would, but then came the statement. Recall that I had said that the Fed would opt for what was behind door #3, which was to acknowledge the market turmoil, but continue to spread the word that the U.S. economy is fine and inflation will rise to their target, thus maintaining their rate hike cycle.

And guess what? I nearly hit that bang on! The Fed signaled renewed worry about financial market turmoil and slow overseas economic growth, but said that they still believed the economy is on track to grow, produce jobs and gradually lift inflation to their 2% target, and therefore they wouldn’t rule out raising rates at their next meeting in March.

OK. Let’s iron out the wrinkles here. First and foremost, I think it was important that the Fed acknowledged the market turmoil, and while “calming markets” isn’t one of their mandates, it is something that they’ve taken on as a hobby, if you will. And in saying that “they would hold their benchmark rate steady for now between 0.25% and 0.50%, they are closely monitoring developments in global economies and markets, ” I think they are admitting that they will consider market turmoil when next deciding to hike rates or not.

This statement by the Fed really boosted the currencies, especially the relatively speaking, higher yielding, currencies, like Aussie dollars (A$), and New Zealand dollars/kiwi. The really higher yielding currencies like the Russian ruble, and Brazilian real both responded favorably, and are firmly on the rally tracks this morning.

Gold initially went higher on the statement’s sentiment, but has given back the late afternoon gains in the overnight markets. No real reason for this giving back its gains, so you know what that means, right? The price manipulators didn’t like the strength that gold was displaying.

The Reserve Bank of New Zealand (RBNZ) did leave rates unchanged as I thought they would last night.  And just as he does at every opportunity he gets, RBNZ Gov. Wheeler, decided to bash kiwi. Wheeler said, “A further depreciation in the exchange rate is appropriate given the ongoing weakness in export prices.”  Oh, yes, the old, “we need the currency to depreciate to help our exports, song and dance”.

I really don’t know what to tell these Central Bankers in this day and age…  They want inflation, they want cheap currency, they want economic growth, when the rest of the world is slow, and they want it all, they want it all, they want it all, and they want it now!

Wheeler also left the door open to a rate cut in March, and that didn’t sit well with the kiwi traders, but with the dominate Fed sounding quite dovish, the chance that the Fed wouldn’t hike rates and narrow the positive rate differential that kiwi enjoys, outweighed the door being left open to a rate cut in March.

So, two Central Bank meetings down, two more to go. First up we have the Bank of Japan (BOJ) meeting tomorrow, and then the Reserve Bank of Australia (RBA) on Monday, when we turn the calendars to February! You may recall me giving kudos to RBA Gov. Stevens back in early December, for chastising the markets for being so myopic about monetary policy and told them to “chill out” and go home to enjoy the Christmas season, and to come back in February. Well, on Monday, I guess everyone in Australia will reconvene.

The Aussie economic data has been mixed since the last RBA meeting, and things in China while got pretty hairy there to start the year, have settled down a bit, so all this tells me that the RBA will leave rates unchanged at this meeting on Monday. And that has gone a long way toward boosting the A$ in recent trading, as we draw closer to Monday’s RBA meeting.

Alrighty then… let’s not forget that the Eurozone 4th QTR final CPI prints tomorrow, and will go a long way toward helping the euro maintain this winning streak it has going vs. the dollar, which happens to be the longest streak since September last year for the euro. Recall that I said that I thought CPI would increase from 0.2% to 0.3% or 0.4%, which is a good sign for the Eurozone. If, the Central Bankers all want inflation in their economies, than I would prefer that the inflation increases be nascent, and grow slowly, to give the Central Bank an opportunity to address it before inflation gets out of hand.

The Chinese renminbi was allowed to appreciate at the fixing again last night, but this time it was a tiny 50 ticks appreciation. So, for the most part, I would call that a flat day for the renminbi. But 50 ticks of appreciation is better than a depreciation, Chuck, you dolt! Think about that for a minute, and when you realize that what you just said was full of doltness, then you can come out of the corner and join the rest of the people here! HA!

China injected 590 billion renminbi into the money markets this week, which happens to be the largest weekly injection of liquidity in three years for China. That’s a lot of dough, folks. But what have I told you over the years about China? That they have a Treasure Chest of reserves to use when things get tough. And use them they have! It’s just really tough times right now, with the economies of Japan, U.K., Eurozone and U.S.  either in recession or heading to recession, or just coming out of recession, and not demanding Chinese exports, the Chinese are lost for an answer.

They tried very much so, to develop a domestic demand driven economy, but that never really got the chance to thrive, given the economic slowdown of the global economies. The Chinese know exports, and while the trade numbers continue to be relatively good, it’s just not enough to give China the chest pounding strength in its economy that it once had, not that long ago!

A dear reader sent me an article that was calling for a Plaza Accord between China and the U.S.  which I thought was interesting, in that I believe that the Plaza Accord that occurred in 1985 had something to do with Japan’s lost decades.  Anyway. then I saw an article on the Bloomberg calling for the world’s Central Banks to plan for coordinated currency intervention akin to the 1985 Plaza Accord to keep the dollar from strengthening more.  WOW!

Joint currency interventions helped stem the previous two dollar strengthening periods since the 1980s, and “it is quite likely that similar actions will be needed in this big USD cycle, wrote Alan Ruskin, co-head of global foreign exchange research at Deutsche Bank.  Ruskin believes that this coordinated currency intervention is what’s needed to stop the dollar and help the Chinese renminbi/Chinese.

That’s pretty interesting stuff, but I doubt that in this day and age, that finance ministers will agree to do something like that, given that they’ve all joined the currency wars, and have set out to weaken their currencies, why would they want to scrap that go about making their respective currencies strong again, at the dollar’s expense? So, once again, it’s all wishful thinking. But, you never know, right?

I just think everyone needs to calm down regarding China. There’s no need for a Plaza Accord, and there’s no need to bail them out currency wise. They will be just fine.

Well, I talked about gold above, and how it is giving back its gains from yesterday afternoon, after the Fed statement. I realized yesterday that it’s been some time since I last attempted to be “fair and balanced” regarding gold, and then I ran into a report on www.agmetalminer.com where they had this to say about gold’s rally so far this year:

We’ve discussed previously that the gold’s safe haven theory doesn’t always work, especially under the market environment we have right now. Gold’s rally is likely to be short-lived. Although stocks don’t look attractive right now, buying gold doesn’t look like a much better idea. Cash will probably give better returns than most assets in this first half.

I maintain that no one really knows (except maybe the price manipulators) where gold is going to go. I think it should be higher in value given the fundamentals, but it is isn’t, so where does that leave us?   It leaves us at square one. we don’t know where the price of gold is headed, but we have a very well informed, and educated idea where it “should go”!

Well, the U.S. Data Cupboard certainly put the housing sector participants in a good mood yesterday, when it was reported that New Home Sales for December jumped 10.8%, thereby blowing the expectations out of the water! Now, before we all go out and start clanging glasses together, and giving cheer to each other, or before we decide to join the conga-line for a dance around the office, let’s sit back and review some things.

For instance, did you know that Sub-Prime home loans are back in style?  Did you know that you can buy a home with as little as a 3% down payment on loans from FHA, Fannie and Freddie Mac? Now, I don’t have details on how many of these 3% down loans were processed in December, nor do I have details on how many Sub-Prime loans were processed in December, but I do know that the FHA insures 22% of all loans originated. And one would think that there would be a fair number of Sub Prime and 3% down loans in those origination loan docs? Doesn’t sound to me like we’ve learned anything, have we? When will they ever learn, when, will, they, ever, learn?

I’m bound to get some flak for talking about Sub Prime and 3% down mortgage loans, but Shoot Rudy, I’m just trying to explain how New Home Sales numbers would be so large!

The U.S. Data Cupboard today, finally has some Tier 1 Data, which comes in the form of December Durable Goods Orders & Capital Goods Orders, which should both continue their streaks of printing negative numbers. These two pieces of data are a part of what I call “key data for an economy”, and their insistence on printing negative is one of the reasons I believe the U.S. economy is headed to Recessionville.

Before I head to the Big Finish today, I wanted to mention that in the U.K. a jury acquitted six former brokers of fraudulently trying to manipulate a widely used benchmark interest rates. Libor – Tom Hayes was convicted of this charge a year ago, and these six brokers were accused of conspiring with Tom Hayes. Well, if it weren’t these six, where’s the next six? Because the guy didn’t do it by himself! UGH!

I came across this article on Ed Steer’s letter, and he had pulled it from www.wolfstreet.com and it talks about something that I’ve been keeping you up to date with, the Corporate bond/junk bond meltdown. Let’s see what Wolf Richter has to say on his website that can be found at the link above.

The toxic pile of distressed corporate debt in the US grew to $285 billion in January, up 22% from a month ago and up 162% from a year ago, according to S&P Capital IQ. The number of distressed issuers ballooned to 324 US corporations, up 20% from a month ago and up 84% from a year ago.

The last time the total amounts of distressed debt and the number of distressed issuers had shot up to these levels was in October 2008, just after Lehman Brothers had filed for bankruptcy.

During the Financial Crisis, the total amount of distressed US corporate debt maxed out at $398 billion in December 2008 and then began to drop as the Fed was dousing the land with QE and started manually bailing out corporations and banks with emergency loans. Today, there are no bailouts in sight, and no one is talking about an emergency. So the distressed debt of $285 billion today is just the beginning.

Chuck again. This whole mess comes about from years of easy credit, and low interest rates that caused investors to stop outside of their normal comfort zones when it came to investing, as they looked for higher yields.  There are other things responsible but these are the big 2.

That’s it for today. I hope you have a tub thumpin’ Thursday!

Regards,

Chuck Butler
for The Daily Reckoning

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