Make Believe Money

And now… today’s Pfennig for your thoughts…

Good day, and a marvelous Monday to you!

Well, the so-called “Judgment Day” last Friday, was simply not what it was cut out to be. I guess in the end though, the Jobs Report did put to bed the thought that the Fed would be hiking rates in June. And the rate hike campers looked like they had lost their puppy, as their shoulders slumped, the chin dropped into their chests, and they shuffled off quietly to the wall boards where they came from. Didn’t hear about the Jobs Report from Friday? Well, it’s all just a little ridiculous to me, that the markets get all wound up over surveys and hedonic adjustments, but it is what it is, so let’s go check the numbers before we talk about the currencies and metals, eh?

According to the report in the Wall Street Journal (WSJ) on Friday. The U.S. labor market decelerated in April, a sign employers may be turning cautious after the economy slowed early in the year. Payrolls rose by a “seasonally adjusted” 160,000 in April, and the Unemployment Rate remained at 5%.

Here’s a little ditty for you that you didn’t see on TV, or hear on the radio or read in the newspaper about the quality of jobs that have been added for the past 2 years: since 2014, the U.S. has added 450,000 waiters and bartenders, and no Manufacturing workers. Boy, I sure get good service when I belly up the bar these days. And here’s another ditty. Since 2014, the oil and gas producers have cut 200,000 jobs. But I don’t recall hearing anyone talk about that. Hmmm…

And wanna know something else about the jobs data? Well, notice above that I highlighted the words “seasonally adjusted”.  That means 233,000 jobs were added by the BLS with their Birth/Death Model. These are “make believe” jobs folks, and without the “Seasonal adjustment” we would have had negative job growth in April. But we certainly can’t allow the markets and investors know that! Oh heaven! The Humanity! With “make believe” jobs you get “make believe” labor markets, but don’t let that get in the way of all those that keep saying that the U.S. economy is doing fine.

Speaking of “make believe”… I’m going to borrow a quote from my friend, James Powell, who had this to say in his latest letter:

The Fed has been pumping huge amounts of make believe money into the economy to get it going again, and it hasn’t worked. That should be no surprise to anyone but the government. With ‘make believe Money’ you get a ‘make believe recovery’.

Alright, I have to stop there on all this craziness regarding the labor markets. Everyone is searching for straws, as some people looked under the hood, which they normally don’t do, as they take the headline number and run with it, and found that wages firmed. Well, it’s about time, don’t you think? Let’s not get all lathered up about that, given that it should have happened years ago!’

And speaking of a rate hike in June, or the lack of one; The Heavyweights have weighed in with their opinions. Bond King, Bill Gross, his old partner, Mohammed El-Erian, are telling their listeners to “not count the Fed out”.  So, here’s my thought on that – these guys got the memo from the Fed, to jawbone about the possibility of a rate hike, so that the Fed members don’t have to, and then have egg all over their collective faces when no rate hike comes in June. Just the way my mind thinks about these things…

So, the Jobs Jamboree wasn’t up to snuff on Friday, and gold took off for higher ground. The currencies rallied, and it appeared for the short-time left to trade on Friday while there was still liquidity in the markets, that the dollar rebound would be short-lived. But when I turn on the screens this morning and look at the currencies and metals, I see a lot of red.

Gold is giving back $16 at this point of the morning, after climbing $10 on Friday.  Once again the price manipulators took their pound of flesh from the gold rally on Friday, as the shiny metal was up over $20 at one point in the day, only to see it get whacked late in the day.

And the currencies… Well, Friday’s rebound didn’t have any legs, and Monday’s early trading has the dollar back in the driver’s seat. The euro was 1.14 when I turned on the monitor this morning, but it has already fallen back below that figure. I appears that the Petrol Currencies that include: Russian rubles, Canadian dollar/loonies, Norwegian krone, Brazilian real and Mexican pesos are about the only currencies to see the light of day, and keep their heads above water this morning, as the price of oil is holding steady around $45.50.

Things in Brazil continue to unravel for the President, Dilma Rousseff. The Impeachment process will head to the Senate now, and from there, and it only takes a majority vote, if she is impeached, she will have to step down the next day. I believe that the Senate vote has been scheduled for Wednesday, so we won’t have to wait too much longer to find out the fate of the Brazilian President, who has been no friend of the markets since she was first voted into office, and immediately, began to chop the real off at the knees.

Germany printed one of the “real economic data pieces” today. Factory Orders for March rose 1.9% VS 0.6% consensus, and previous print of -0.8%… So, a real nice rebound for the German Factory Orders, and while it’s just one report, and I know I always tell you that one report doesn’t make a trend, like one swallow doesn’t make a summer, but, think about this before we rudely dismiss the one month results. We’ve gone from -2.1% to -0.8%, to +1.9%, do you see the momentum building there? I did, I did, said Tweety Bird!

Economic growth around the world is suffering. But there’s one large economy, and not some third world country’s economy, that’s outperforming all others. Can you guess who it is? Well, if you said India, then you win the gold star today!

Yes, India, and here’s another piece of the puzzle that is in India’s favor as they just printed their April Car Sales report, which showed car sales jumping by 11.1%! And marked the first double-digit prints in back to back years for India! And the Indian people aren’t that different than we are here in the U.S. when it comes to taste in vehicles. The majority of the vehicles purchased were SUV’s and Vans. Of course here in the U.S. Americans are still lining up to buy pickup trucks!

The problem the Indian rupee has is that it is so influenced by the Chinese renminbi. And there are times the Indian economic reports would signal a rupee rally, but the renminbi is being treated harshly by the People Bank of China (PBOC) and that leaves rupee traders with their collective hats in their hands. But the renminbi was allowed to appreciate overnight in the fixing, so the rupee is on the rally tracks today, after the strong car sales report.

Speaking of China… China’s FX reserves edged higher in April $6.4 billion, and that follows a $10.3 billion gain in March. So, if there’s no so-called Shanghai Accord, in place to stabilize the renminbi, then this is the miracle of Marco Polo! The renminbi is basically flat vs. the dollar so far this year, and that’s a lot like holding the renminbi before the Chinese broke the peg to the dollar in July 2005! But there’s a caveat here that we didn’t have pre-2005, and that is the de-dollarization that’s going on with China and Russia.

And speaking of Russia… did you hear what Russia has done now to move their de-dollarization plans further down the road? It appears Russia is close to taking the next big step towards de-dollarization and killing the petro-dollar as Vladimir Putin’s “dream” of ruble-based pricing of its domestically-produced oil is on the verge of realization. SPIMEX (The St. Petersburg International Mercantile Exchange) is actively courting international oil traders to join its emerging futures market, which as Bloomberg reports, is designed “to create a system where Russian oil is priced and traded in a fair and straightforward way.”

F. William Engdahl was quoted as saying, “This move could deal a dramatic blow to the petrodollar’s dominance”.  You think? WOW. A new Mr. Obvious for us today!

And the Japanese yen is weaker again this morning, proving once again that the recent miracle of Japanese yen was just smoke and mirrors. Yes, we had the so-called Shanghai Accord mixed in that pushed yen higher, but in the end, traders have to be wondering: “What the heck am I doing, being long yen? This is craziness and if you looked the word crazy up in the dictionary it would have a picture of a trader holding yen! 

So, the Japanese government isn’t doing anything they haven’t already done to weaken the yen, so they aren’t ticking off the G20 leaders that called for the so-called Shanghai Accord, calling for the dollar to weaken. The Japanese government can’t help it when traders come to their collective senses!

Well, guess what’s back on the calendar to discuss nearly every day going forward? Yes, it’s Greece… And not the movie!  Today, Eurozone Finance Ministers (Fin Mins) will meet in Brussels to discuss Greece. The Greek government has been asking for contingency fiscal measures and a restructuring of their debt. Nothing will be decided today, but here are some dates to keep in the back of your mind, should this Greece stuff interest you. First of all May 24, the next Eurozone Fin Mins meeting, and then late July, a scheduled EUR2.3 billion repayment is due to the European Central Bank (ECB).

Canada is having some very dangerous and damaging fires in Alberta. These are very bad fires folks, and besides all the things that go with devastating fires like this, Canada’s oil revenue is getting whacked. The loonie has seen a nice recovery this year so far, but this is something that could end up weighing heavily on the loonie, folks. Be careful here…  But right now, it doesn’t appear to be affecting the loonie too much, but it could end up doing so.

The U.S. Data Cupboard is empty today, and we just have two Fed members speaking today, Evans and Kashkari, will speak about who knows what. And the Data Cupboard will be very disappointing this week as it’s one of those data -void weeks here in the U.S. We won’t see any real data, until Friday, when the April Retail Sales report will print. Let’s see, April we had Easter, the start of the new baseball season, and spring.  I would think that Retail Sales would at least be positive for April, at least that’s what the BHI is indicating to me!

For What It’s Worth. It’s not every day that I get to quote the great James Grant, he of the Interest Rate Observer newsletter that has strict rules about using snippets of his letter. But when he gives an interview with someone else, then it’s all fair game, and nothing makes me smile larger regarding this stuff than finding an interview with James Grant. So, the interview is really long, but you can find it all at ZeroHedge it was post last Friday, or opt for the snippet:

Diminishing returns is the essential problem of the debt: Past a certain level of encumbrance, a marginal dollar of borrowing loses its punch. There’s a moral dimension to the problem as well. There would be less debt if people were more angelic. Non-angels, the taxpayers underpay, the bureaucrats over-remit and everyone averts his gaze from the looming titanic cost of future medical entitlements. Topping it all is 21st-century monetary policy, which fosters the credit formation that leads to the debt dead end. The debt dead end may, in fact, be upon us now. A monetary dead end could follow.

Thus, the thought processes of Janet Yellen’s predecessor. Reading him, we are struck, as ever, by his clinical detachment. Does the deployment of helicopter money not entail some meaningful risk of the loss of confidence in a currency that is, after all, undefined, uncollateralized and infinitely replicable at exactly zero cost? Might trust be shattered by the visible act of infusing the government with invisible monetary pixels and by the subsequent exchange of those images for real goods and services? The former Fed chairman seems not to consider the question- certainly, he doesn’t address it.

To us, it is the great question. Pondering it, as we say, we are bearish on the money of overextended governments. We are bullish on the alternatives enumerated in the Periodic table. It would be nice to know when the rest of the world will come around to the gold-friendly view that central bankers have lost their marbles. We have no such timetable. The road to confetti is long and winding.

Chuck again. James Grant says that “we judge that the government’s money is a short sale.” Hmmm… he’s telling us the dollar is a short sale folks. And when James Grant talks, I sure do listen!

That’s it for today. Thanks for reading the Pfennig, and I hope you have a marvelous Monday, and be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

P.S. “If you want to be informed rather than disinformed, go to The Daily Reckoningwebsite and sign up for the free Daily Reckoning letter.” That’s what one leading author said about the free daily email edition of The Daily Reckoning. Don’t miss out another day. Click here now to sign up for FREE.