Negative Rates & Abolishing Cash For the U.K.

And now… today’s Penning for your thoughts…

Good day, and a marvelous Monday to you!

Regarding the global economy, us old timers know better than the central planners of each country. There’s been a structural shift in the global economy, and the only place you can find inflation is Brazil and Russia, which also happen to be the only places you can find high yields on bonds and deposits.

The Fed admitted it in so many words last week, and this week, European Central Bank members will be out in force speaking and will probably sing from the same song sheet as the Fed did last week.  That same song sheet has the words to a song that has these central planners baffled. It simply spells out that there is no inflation, to speak of, and all the kings horses and all the kings men, can’t put inflation back together again.

The Central Banks/planners all thought that their monetary policies of ZIRP (zero interest rate policy), multiple rounds of Quantitative Easing/QE, would stir the inflation pot in 2015. But that isn’t happening. I shake my head in disgust, because, they won’t just leave things alone.  And see what happens?

So, now that the dust has settled on the FOMC decision last week to hold rates unchanged, and then sound like they had gone back to the late 60’s. You know, “peace man, we’re not here to upset the applecart, hey is that Barry McGuire singing, You don’t believe we’re on the eve of destruction?” I kid. I sure hope no one got their feeling hurt, but the leader of the band, Fed Chair, Janet Yellen, did sound very dovish, and that’s all I’m saying here.

And that “sound” had the dollar on the run last week, but as we start out this week, the dollar is taking back some lost ground from most currencies, with the Russian ruble, Mexican peso, and Canadian dollar (now that’s a strange trio, eh?) the only currencies with gains vs. the dollar today.

So, as I said above, the European Central Bank (ECB) members are scheduled to be out in force this week, talking about the need for additional bond buying (QE) to stir up inflation, which you may recall printed last week at 0%, but that was up from the negative -0.6% from the previous month. And none of that talk is going to help the euro, folks. And when the euro gets pressure from the dollar, so too do the other currencies, especially the “other” currencies in Europe, like the franc, krone, krona, and pound.

When I saw that rubles, pesos, and loonies were the only currencies with gains this morning, I thought, Ahhh, the price of oil must have gone higher again, so I flipped the screen over to the raw materials screen, and the price of oil was actually a buck lower than it was on Friday morning, printing this morning at $45.53. But, it was gaining some lost ground back as I checked, and that’s probably why the petrol currencies, minus the real , krone and pound, are gaining today, and the pressure on the euro is the reason the real, krone and pound aren’t able to participate in the petrol currencies gains.

The Chinese renminbi was really pushed down overnight. It was a larger than usual weakening. I didn’t see any data from China over the weekend that would warrant this downward move. The Flash PMI’s (manufacturing index) will print this week. I have to think that the Chinese currency controllers were given a heads up on the data, and they took this opportunity to push the renminbi down ahead of what probably is going to be a weak PMI. Now to be clear, I don’t know that this is what was done. I’m just thinking out loud.

Speaking of China… there’s a U.S. company that issues a “China Beige Book”, and it’s modeled on the survey compiled by the Fed on the U.S. economy. And this Beige Book tells a different story of the Chinese economy. First, the Chinese economy isn’t as weak at is may look. Second, capital expenditure is rebounding and the services is showing strength. And then they go on to say something I liked: “Perceptions of China may be more thoroughly divorced from facts on the ground that at any time in our nearly 5 years of surveying the economy.”

Well, that’s all good and that, but we have to see the proof in the pudding, right? The economic data has to show some life.

The Aussie dollar (A$), which recently had put on some nice gains to its value, and moved through the 72-cents figure, has given back some of those gains in two days of trading now, and has fallen back below 72-cents. The charts guys would say that the A$ had fallen through the base of its recent upward channel.  I prefer to just say that it just fell back below the figure.

But you know me, I’ll try to explain how traders talk and chartists talk, just so when you’re standing around talking to a group of people at a cocktail party, and some wise-guy says something like, “Hey, did you see that the A$ has fallen lately?” You can either say, my way, or the chartists way, and you’ll sound like Mr. Know-it-all!  HA!

In Canada on Friday, the latest CPI (consumer inflation) report printed. The August CPI year on year printed bang on with expectations of 1.3%… Annual Core CPI was 2.1%, but just like they do here, they throw that number out with the bath water, and only focus on the inflation number that doesn’t include food and energy. As if they don’t exist, right?

Oh well, I would say that for an industrialized nation, that Canada has the highest inflation rate. So what are they doing that gives them the inflation that the Fed and ECB and Japan are all starving for?  Oh, they aren’t doing anything, right? No QE. Yes, interest rates are low, but they’re not zero!  So, we’ll see which country come out ahead of the others won’t we?

So, I’ve mentioned the pound a couple of times this morning, but no real talk about the currency. Well, it’s all more of the same-o, same-o, with the pound. All the rate hike talk in the U.K. has dissipated, and now I’m seeing the forecasts for the first rate hike in the U.K. pushed all the way to next May! WOW! That’s a long way off. But quite frankly, I wouldn’t doubt that the U.S. would still be looking for its first rate hike at that time too!

But this weekend, I was going through email, as I struggled to watch my beloved Missouri Tigers go three and out on offense time and time again. UGH! But, while going through my email, I saw an email from the GATA folks, that quoted an article in the Telegraph, that had some comments by the Bank of England (BOE) Chief Economist, that should weigh heavily on the pound.

“The balance of risks to U.K. growth and to U.K. inflation at the two-year horizon, is skewed squarely and significantly to the downside.”  And that led him to then say, “that the case for radical option of supporting the economy with negative interest rates is strong, and that the U.K. might even need to abolish cash.” WOW! I wonder if he still has a job this morning. Really, I’m serious! This guy has gone outside the lines in the U.K. coloring book, and I doubt that BOE Gov. Carney is going to take too kindly to this kind of talk.

The U.S. Data Cupboard is basically empty today, with only Existing Home Sales to print. And the real data doesn’t get rolling out of the Data Cupboard until later this week, when Durable Goods Orders prints. the Markit PMI’s will print this week, and should show the continued trend of weaker prints each month.

And gold is down $5 this morning. I also read this weekend in Ed Steer’s letter that Russia’s Central Bank bought 1 Million Troy Ounces of physical gold in August. So, the physical buying of gold & silver just continues to be stronger than strong.

Speaking of physical gold, did you see our Sunday Pfennig? Our metals guru, Tim Smith, had a BIG announcement, and I’ve followed that up with the ad at the top of the letter.  If you missed it, check your email box, and if you can’t find it (and I know why you wouldn’t be able to find it, but we won’t discuss that now! HA!) simply go to: www.dailypfennig.com and read it!

Man, you can’t believe how great I felt this weekend, when I opened up John Mauldin’s weekend newsletter and saw him talking about stuff that I’ve said will happen long ago. I was shocked and amazed that he was going down this road, only traveled by me, and a few others around the world. And that is simply that the U.S. is going to head back into recession and when they do, another round of QE is coming.  If you get a chance go and check out John’s most recent letter, you’ll think that you’re reading an old version of the Pfennig! You can find it here.

But that’s not what I’m focusing on here today. In that same letter from John Mauldin, he had a piece from a Peter Boockvar of the Lindsey Group that I thought was very good. So, I’ll set this up, the writer, is talking about how sorry his that the Fed punted again. Let’s listen in:

Lastly and sorry to speak from my soap box to those who don’t care to hear it but, I’m sorry to the retirees that have saved their whole lives. I’m sorry to the generation of young people that don’t know what the benefits of saving [are]. I’m sorry to the free markets that best allocate capital. I’m sorry to pension funds that can’t grow assets to match their liabilities. I’m sorry to the successful companies that are competing against those that are only still alive because of cheap credit. I’m sorry to the US banking system, [which] has been hoping for higher interest rates for years. I’m sorry to those industries that have seen a pile of capital (aka, energy sector) enter their industry and have been or will see the consequences of too much capacity. I’m sorry to investors who continue to be bullied into making decisions they wouldn’t have made otherwise. I’m sorry for the bubbles that continue to be blown. Again, I’m sorry to those who don’t want to hear this.

Chuck again. I thought John did a great job in the letter picking it back up from Peter, and he said, “What he said”.  Which is John’s way of saying he agrees wholeheartedly with what was said. So, I have to say something different. And I’ll borrow something from the kids, and just say, “word”.

That’s it for today. I hope you have a Marvelous Monday!

Regards,

Chuck Butler
for The Daily Reckoning

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