Let's All Play Kick The Can!

And now… today’s Pfenning for your thoughts…

Good day. And a Tom terrific Tuesday to you!

Front and Center this morning, there’s news from Washington D.C. that a deal has been reached on the Debt Ceiling, to avoid a shutdown of the government.  No, we didn’t agree to cut spending, and no we didn’t agree to stop kicking the debt can down the road. What the lawmakers did agree on was to EXTEND the government’s borrowing authority until March 2017.

Oh Boy! Where do I take my place in the parade for this agreement? Where’s the confetti to drop from the sky as we parade through the streets as people adore us for keeping the government from shutting down…

OK. Back to reality here. We still have a sticky subject that has a deadline of December 11, and that is to resolve the differences over spending priorities and policy overrides. These could throw a spanner in the kick the can down the road agreement, but I doubt it. We, as a country are going to continue to chug along, with a HUGE Debt on our shoulders, until one day, when we won’t be able to.

When that is, is anyone’s guess, but when it happens it will be too late to do anything about it. We’ll wake up one morning, and see Treasury yields soaring higher, and the Chicken Littles all out in the street. But it will be too late, baby, now it’s too late.

So, this news of a “deal” has the dollar with the conn this morning. It’s not an all-out assault, just small moves downward in the currencies. The Aussie dollar (A$) and N.Z. dollar/kiwi are basically flat, as their down just a couple of ticks, the same with the euro, just so you get a feel for what I’m talking about. The Chinese renminbi is the shining star today, as it is the only major currency that I follow with a gain vs. the dollar overnight.

I think in the end, the markets figured this is what the U.S. lawmakers would do, kick the can down the road, so their reaction to the news has been watered down a bit. We also have the Fed’s FOMC meeting tomorrow, so a move ahead of that meeting, even though there’s no thoughts out there that the FOMC will do anything at this meeting, is being viewed as risky.

Let’s keep in mind that I previously threw out there for everyone to mull over, the scenario where the Fed uses this meeting to surprise the markets with a very small rate hike. You know 10-15 Basis Points. What better time for them to fulfill their promise to the markets that they would be hiking rates in 2015, and at the same time not upset the applecart too much?

That was just my spider sense tingling at the possibilities. At the end of the day, I still don’t think interest rates are going anywhere this year, or next year!

Did you know that historically, here in the U.S. we experience a recession about every five years? No, the recessions aren’t always deep and long, sometimes their shallow and short, but just about every five years they come along. It’s now been six years since the last recession here in the U.S., although I still contend that the recession never ended, but that’s just me, technically, it’s been six years.

I guess we can remove the Debt Ceiling debate as one of the things that could tilt the economy to a recession again. We still have the Fed out there with their cries for higher rates, which would, as most observers believe, throw the economy for a loop and bring about a recession.

Let’s listen in to the great economist, Stephen Roach, who said:

In the 22 quarters since early 2008, real personal-consumption expenditure, which accounts for about seventy percent of US GDP, has grown at an average annual rate of just 1.1%, easily the weakest period of consumer demand in the post-World War Two era. It’s also a massive slowdown from the pre-crisis pace of 3.6% annual real consumption growth from 1996 to 2007.

How would the Fed respond to a recession, because you know they would, as they think that they know better. Well, let’s turn to former Fed Chair, Big Ben Bernanke, who had this to say about this subject:

If another recession were to strike, the central bank could resume pumping money into the economy, promise to keep interest rates at zero even longer or even turn them negative, essentially doubling down on the experimental policies from which officials have been trying to extricate the economy. They’re not, on a whole, as super attractive set of options. So you would hope first that you avoid that situation.

So, are you bored with this discussion? Well, these are all just some things I had to get off my chest this morning. Sure, it sounds like “deep stuff” that we cover in the Sunday Pfennigs, but after all these years I’ve found that I always feel better when I have a thought or something to say, that I just say it!  Don’t wait, say it!  So, there’s our Butler Patio discussion today. Now let’s get back to what’s going on around the world…

In the U.K. 3rd QTR GDP printed worse than expected.  3rd QTR GDP was expected to print at 0.7%, but instead printed at 0.5%…  So, when’s that rate hike coming, Mark Carney?

For those of you new to class, Mark Carney is the Gov. of the Bank of England (BOE) and in the summer of 2014, he began to talk about how he was going to hike rates. We are now about 15 months from the summer of 2014, and still no rate hike, and to boot, now it appears that the U.K. economy is having problems with growth.  So, it makes abundant sense that the pound sterling is weaker this morning. Not by much, but still weaker.

Yesterday, I told you that I didn’t think the Central Bank meeting in Sweden with the Riksbank, would amount to much, but upon further review. I stand, actually I sit corrected. This could actually be the meeting where the Riksbank makes one final move and then sits back to watch how things work out. So, this could mean that the Riksbank widens their negative rates, and could also add to their bond buying program, aka Quantitative Easing/QE.

But, after the initial weakness of the krona from these moves, we could begin to see changes in Sweden’s monetary policy. I was reading some research, and I came across a statement that I thought was interesting. The Riksbank  talked about how it wasn’t going to help Sweden to continue to follow the European Central Bank (ECB), for they believe that by early next year, they’ll be reversing the stimulus, while the ECB will still be mired in a deep recession.

Pretty interesting, eh?

As I said above, the Chinese renminbi is the only currency with a gain vs. the dollar this morning, that I follow that is. It appears that this is a month-end thing. Here’s the skinny…

Chinese export companies are selling dollars at month-end to pay bills. This selling of dollars and buying of renminbi is responsible for the fixing being stronger this morning, and yesterday morning. There was also promising news from the Chinese Factories, where Chinese Factory profits showed that net income contracted at just -0.1% in September from a year earlier, and vs. the August decline of -8.8%!

WOW, that’s quite a one-month improvement!

In other news from China… late last week, China announced that they were removing their deposit rate ceiling. This is just another step in their financial liberalization, that will put them in good standing with the IMF.

The price of oil has dropped another buck to a $43 handle. This came about after the U.S. announced that they are going to begin to sell their strategic oil reserves to generate cash for the government.  They could have easily said they were generating cash for the government to spend.

But really?  Is this necessary? Let me point out that this oil isn’t called, “oil for sale” or the short-term holdings.  It’s called the strategic oil reserve. Oh well, the sales aren’t to begin to take place until 2018, so by then things could change, eh?

Well, as I told you yesterday, the U.S. Data Cupboard gets restocked today, but first a look-back to yesterday’s data, which showed the sales of New Homes in September fell -11.5% from the previous month. I had this feeling yesterday that this data was going to suffer, and that’s why I left it open with my thought that after the Fed meeting in September, things could have gone South for New Home Sales.

Today’s Data Cupboard has Durable Goods & Capital Goods Orders.  Last month, Durable Goods Orders originally printed negative at -2.0%, but that figure has been revised downward already to negative -2.3%…  The September figure is expected to also be negative, thus continuing the trend of weak and soft data here in the U.S.  Capital Goods Orders has been a real drag on the economy, so I expect this to be disappointing too.   The S&P/CaseShiller Home Price Index will print for August today. I would think that home prices continued to go higher by a smidgen.

Gold is up nearly $3 this morning and has been trading between $2.50 and $2.95 all morning while I’ve been writing. Well, the word is out and now everyone must bow down and acknowledge the almighty leader of world investing.

Bloomberg, has an article this morning that’s titled: “Goldman Sachs Says Fed Raising Rates In December To Hurt Gold”.  So, get this; Goldman says that the Fed will raise rates in December and then follow that with a further 100 Basis Points of increases in 2016.

Geez Louise, I wish I had seen this article when I was going through all the recession talk above, because if this is true what Goldman says, and why would anyone ever doubt what they say about what’s going to happen in a market to not come true, (wink, wink) then I would have been able to include this in on what could bring about a recession here in the U.S.!

Remember the old common refrain in economics, and that is expansions don’t die of old age. Rather they are victims of policy decisions.   I could give you two such examples. Back in the 1980’s remember Paul Volcker? And the spring of 2001. This is actually a good example of how economists can’t see the forest for the trees. In 2001, the economy was strong, but the country faced weak growth abroad, and then the fallout of the dot-com bubble hit the economy, but in the face of all this, only 15% of economists surveyed that summer believed a downturn had already begun, according to Blue Chip Forecasts.  Yet the nation was in the midst of a recession that lasted nine months.

Before we head to the Big Finish today, I came across something yesterday, that made me smile, well in my mind I smiled. it was an article on MarketWatch, and it’s title was: China, where driving a Buick and drinking a PBR are signs you’ve made it.    So, of course I had to hit the link and read the article!  And in the article was a list of 5 Brands that are considered to be C-List here in the U.S.  But is on the list of “you’ve made it” in China.

And the top of that list has Pabst Blue Ribbon Beer (PBR).  You know, back in the day, when AB was always on strike, a young man I know all too well, would opt for PBR in place of his Budweiser, when the latter was not available!   Second on the list is Howard Johnson’s. Yes, the Ho-Jo’s.   There are more than 200 Ho-Jo’s in China!  #3. It’s driving a Buick. Not your grandpa’s Buick either!  I love that commercial on TV, with the two young ladies talking, and one says is that a Buick? And the other says, “My grandpa used to drive a Buick”, and when the tall handsome man gets out of the Buick, the first girl says, “That’s not your grandpa!” HA!

#4. Pizza Hut.  There was a time back in the 80’s that I would order Pizza Hut pizza or go to Pizza Hut at least once a week, if not two! There are more than 1,000 Pizza Huts in China, which by the way are more upscale than the version here. and #5. Budweiser. So, while beer sales here in the U.S. are faltering, Budweiser, which sells sometime almost triple of what it costs for a local beer, is aiming to become the “King of Beers” in China.

So, let’s see. 2 beers, a pizza joint, a hotel, and Buick are the top 5 brands  in China for brands that sell in both the U.S. and China. And hey! Who says that Budweiser is on the C-List in the U.S.?  I’d much rather partake in a Bud than a peach/cinnamon beer that some artsy place is brewing!

That’s it for today. I’ll get out of your hair this morning, and send you on your way to having a Tom terrific Tuesday!

Regards,

Chuck Butler
for The Daily Reckoning

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