Michael Burry Says Debt Is Our Biggest Problem...

And now… today’s Pfennig for your thoughts…

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

Well, we had three central bank meetings with rate decisions yesterday afternoon, and all three walked away from the rate move table, and threw in their cards, and folded. That’s what it seemed like to me. Of course for the Bank of Japan (BOJ) and Reserve Bank of New Zealand (RBNZ) not cutting rates was like manna from heaven for their respective currencies, and both have rallied nicely overnight and through the morning sessions.

The Fed’s meeting was met with a different feeling toward what’s going on. You see the Fed was supposed to be wearing rate hike clothes by now and sipping Champaign, and high-fiving each other, as they celebrated the economy rebounding, that warranted another rate hike.

But that’s not the scene at the Eccles Building, where the Fed meets. Instead, the Fed said that they were “in no hurry to hike rates in the coming weeks”. And instead of high-fiving each other for a rebounding economy they were citing a mixed economic backdrop and lingering concerns about low inflation and global economic and financial developments.  That certainly doesn’t sound like a Central Bank that’s ready to hike rates does it to you?

And today’s Data in the U.S. is going to confirm what the Fed is feeling. The first print of first quarter GDP will print today. I told you yesterday that my GDP Tracker has first quarter GDP at 0.4%, which is basically a rounding error away from negative growth! Of course, the government could throw all kinds of hedonic adjustments in there that we don’t’ know about right now, but without them, the first quarter GDP is going to look very weak, and that’s going to linger on the minds of the Fed members all the way to the June meeting.

So, the Japanese yen and New Zealand dollar/kiwi both soared on their respective Central Bank leaving rates and monetary policy unchanged, and the dollar got whacked for not hiking rates. So, let’s see if you’ve been paying attention all these years. If the dollar is getting whacked what’s the euro doing? Yes, the euro is on the rally tracks this morning, and with the price of oil holding yesterday’s gains, the petrol currencies are all trading stronger this morning. So, it’s one of those days, when the strong dollar trend looks tenuous at best.

The BOJ left all facets of their monetary policy unchanged against a widespread thought that they would add to stimulus with one of their directives. Remember, earlier this week, I explained to you that the BOJ has been warned by the IMF to not do anything deliberately to weaken the yen, and the BOJ complied with that warning. I don’t make this stuff up folks, and if I do, I tell you.    

So, anyway, it looks as though the so-called Shanghai Accord is still in place. And for those of you who missed class that day, the Shanghai Accord is an apparent agreement between the U.S., Eurozone, Japan, China and maybe the U.K. to weaken the dollar, to remove the pressures on these countries and the Emerging Markets. According to some analysts, this agreement was reached at the G20 meeting in Shanghai in late March. And the IMF is the body that carries out these directives of the G20.

And gold is up $8 this morning, adding to yesterday’s gain which took the shiny metal to the cusp of the dreaded $1,250 level again. So, just wait until the NY boys and girls come in and see that gold is $1,258 this morning. Three times in the past couple of weeks gold has traded past $1,250, but each time it has seen major resistance (price manipulation to be blunt) and has had to regroup and build back up to get to $1,250 again.

I’ve always told you that whenever you see a trading pattern like this, what you get are traders that will attempt to get past resistance a few times, and then if they don’t succeed, they will walk away from the asset, and look for something else to trade. So, let’s hope we’re not “there” yet!

I was reading my friend’s weekly newsletter written by John Mauldin, and he was talking about retirement, which is a subject that’s near and dear to my heart, as I grow older each year (And am thankful I am allowed to do so!) Here’s John with some very scary statistics:

And the data in the US is pretty stark. The average savings of a 50-year-old is only $42,000. The average net worth of somebody between 55 and 64 is $46,000. A couple at age 65 can expect to pay $218,000 just for medical treatment over the next 20 years. Eighty percent of people between 30 and 54 believe they will not have enough money to retire. One in three people have no money saved for retirement at age 65, and almost 40% are 100% dependent on Social Security. And we wonder why Social Security is the political third rail?

His idea to combat the fact that Social Security is wobbling, and pensions are proving to be false promises; “Don’t retire.”   Of course that’s easy for him to say, he owns his own business, and does investment research and analysis, that certainly isn’t available to everyone!

I also do investment research and analysis, but I don’t own my own business. One day they could call me in an office, pat me on the back for all my years of working long hours, and travel, and so on, and show me the door. And I can’t get a job as a greeter at a Big Box Store, because I can’t stand for that long!

That’s where my good friend, the retirementor, Dennis Miller comes in. And he has been helping individuals nearing retirement, or already retired for years now. And you can find him through a letter that he sends out weekly of which you can review and subscribe by clicking here.

The Reserve Bank of New Zealand (RBNZ) left rates unchanged last night, as I suspected they would. There were a small number of economists that believed the RBNZ would cut rates last night. Apparently, they don’t read the Pfennig! HA! The RBNZ basically took the previous meeting’s notes and reprinted them, saying that future rate cuts will depend on the economy’s performance.  And there we have another example of a Mr. Obvious playing Central Banker.  But the markets loved the non-move and like I said above kiwi is soaring this morning.

The Aussie dollar (A$), after getting whacked yesterday for a weaker than expected inflation report, is rallying with kiwi, and the A$ grabs ahold of kiwi’s coattails. It’s usually the other way around, since the Aussie economy and size is much larger than New Zealand’s, but today, kiwi is the leader. And the A$ is following the leader, the leader, the leader, The A$ is following the leader wherever it may go. We will get an idea of how the Reserve Bank of Australia (RBA) feels about the weaker than expected inflation report when a RBA member speaks. As I said yesterday, I don’t think the RBA will panic reading the soft inflation report, for right now, it’s just one report. I guess we’ll see tonight what the RBA really thinks about it.

I actually forgot about another Central Bank meeting that took place yesterday afternoon – The Brazilian Central Bank (BCB) left their Selic Rate unchanged at 14.25%. The Selic Rate is the internal rate for the country, like our Fed Funds Rate.

The BCB has said on numerous occasions that they would love to start a rate cut cycle to help the economy, unfortunately, inflation in Brazil remains a major obstacle to cutting rates. Brazilian inflation has been trending downward, and that is a result of the high Selic Rate, so if I were the BCB I wouldn’t do anything until you know for sure that inflation is on a downward path that won’t be reversed by a rate cut. In January this year, inflation in Brazil was 10.71%, Feb it fell to 10.36%, and March it fell to 9.39%…  On the right path, but still way too high.

The stronger real has really helped with inflation in Brazil. And all countries should take note of what a stronger currency can do to inflation, for one day, the global deflationary environment will change, and when it does, I think it will change quickly, and the move to high inflation will surge.

Remember last year, when I would talk about Ireland coming out of the dark abyss, and getting back on their feet, thanks to the austerity measures they took when things (debt) got out of hand? Well, guess who’s the next eurozone country to look like their getting back on their feet thanks to austerity measures? Spain. I didn’t want you to have to wait for that answer!  Recent PMI’s (manufacturing index) from Spain show strong rebounds, and now the Labor Sector is seeing robust moves to get stronger! 

First QTR Labor Force for Spain saw the unemployment rate drop to 20.4% (last year it was over 25%!). Spain needs to keep the momentum going here and make reforms in their labor market so that we can continue to see drops in the Unemployment Rate!

Now, a few of you will recall me telling you all over a year ago, that what I was seeing was a building shortage in silver. I really thought that 2015 would be the year that silver took off and closed that gap on the price ratio between silver and gold, which used to stand at 15, but is now much wider. And as usual, I was early on the call. UGH! One of these days, I’ll learn to hold on to something longer before telling everyone what’s coming! But probably not, I just can’t keep ideas under my hat! 

Anyway, according to Bloomberg:

Output from mines will fall for the first time since 2011, while demand for the metal in uses including industrial products and jewelry is heading for a fourth straight gain, supporting prices, according to CPM Group. The market is entering what is ‘likely to be a pivotal year,’ the New York-based researcher said in its ‘Silver Yearbook 2016’.

Here’s the link to the article on Bloomberg in case you want to read the whole enchilada.

Supply troubles. Hmmm… Well, if you bought silver last year, (like I did because I really thought the supply problem was going to hit in 2015) at least you bought it cheaper than it is today, and potentially could be in the coming years!

Well. Remember back in January of this year I told you that Chuck and Kathy went to the movies and saw the movie The Big Short? One of the principal persons in the movie was an fund manager named Michael Burry. He’s the guy that did all the research into the securitized mortgage bonds and found all the bad loans in them, and decided to short the market. He was very early to this idea, and had to suffer through months of agony and losses, nasty customers, and so on, before the housing sector finally collapsed.

This guy is a genius, no mistake about it. And New York Magazine did an interview with him a couple of months ago and asked him what he thought about what’s going on now. Let’s listen in:

Where do we stand now, economically?

Well, we are right back at it: trying to stimulate growth through easy money. It hasn’t worked, but it’s the only tool the Fed’s got. Meanwhile, the Fed’s policies widen the wealth gap, which feeds political extremism, forcing gridlock in Washington. It seems the world is headed toward negative real interest rates on a global scale. This is toxic. Interest rates are used to price risk, and so in the current environment, the risk-pricing mechanism is broken. That is not healthy for an economy. We are building up terrific stresses in the system, and any fault lines there will certainly harm the outlook.

What makes you most nervous about the future?

Debt. The idea that growth will remedy our debts is so addictive for politicians, but the citizens end up paying the price. The public sector has really stepped up as a consumer of debt. The Federal Reserve’s balance sheet is leveraged 77:1. Like I said, the absurdity, it just befuddles me.

In the end when asked about what he sees now – “he doesn’t see imminent destruction, just the slow build of yet another doom machine.”

I’ve got to give kudos to my friend and colleague, Ty Keough, who found this interview and sent it to me. Thanks Ty! And if you want to also read this entire interview, which I think is very good you can find it here.

The U.S. Data Cupboard yesterday had a couple of minor things to report. The Trade Deficit, fell to $56.9 billion in March from $62.9 in February. That’s a huge chunk from that deficit, but you must remember that in March we were seeing the dollar begin to back off its strong trend, and if I’m right about this, of which I’m sure I am, next month’s Trade Deficit will be even lower, because of the further weakening of the dollar in April. March Pending Home Sales also printed, and showed that there could be some strength still holding on in the housing sector. But in reality no one really looks at this for market moving data, so moving on.

The U.S. Data Cupboard today has the first reading of first quarter GDP here in the U.S. And I’ll remind you that my GDP Tracker has this print at 0.4%, while the “experts” surveyed think that GDP will be 0.7%. Either way, the data shows the economy is very close to going negative on growth. And this is where I’ll remind you that I’ve long thought that GDP was not the best way to measure the growth in the economy. Too many things that don’t make sense are included in the calculation. Instead I like to think that Final Sales is a better way to measure the economy’s growth. I haven’t seen the most recent Final Sales data in over a month, but at last checked last month, Final Sales were still trudging along with an avg. since 2007 of just 2%.

This is an article on Russia and China trading gold, and can be found on Reuters here, and here’s your snippet:

“TB Bank, Russia’s second-largest lender, aims to supply between 80 and 100 tonnes (2.57-3.22 million troy ounces) of gold to China per year, the bank said on Tuesday after it started the shipments.

VTB said earlier on Tuesday it had dispatched its first batch of gold to China, becoming the first Russian bank to start direct supplies of physical gold to the world’s largest buyer and consumer of the precious metal.

‘The volume of the first supply totaled one tonne of gold. It was sold directly to one of China’s largest financial institutions in April,’ the bank said in a written reply to questions from Reuters.

VTB aims to boost deliveries of the metal in the next 12 months, plans to expand its precious metals portfolio and increase the number of partners to become one of the leading suppliers to China’s market, it added.

Chuck again. When I read this article, my first thought was that I would have thought this to be case already, that whatever gold Russia produced and didn’t keep for themselves they were shipping to China. I also see that Ed Steer thought that too, so two great minds can’t be wrong can they? HA!

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

Regards,

Chuck Butler
for The Daily Pfennig

P.S. Will the Fed raise rates at its next meeting? Is China preparing to shock global markets by devaluing the yuan? You’ll find the answers to these questions and more in the free daily email edition of The Daily Reckoning. In a way you’re sure to find entertaining… even risqué at times. Click here now to sign up for FREE.