No Props, No Support, No Funny Reports

And now… today’s Pfennig for your thoughts…

Good day, and a wonderful Wednesday to you!

This morning, it does appear, is all about the currencies. They are mixed, but the currencies that are on the rally tracks are pushing the currency envelope for stronger values, and the currencies that aren’t on the rally tracks this morning, have their own personal issues. We’ll get to those in a minute.

But first, Crude prices have rebounded a bit and that has helped the petrol currencies. It looked as if the price ofo would go into a free fall yesterday… And then the price turned on a dime, and gained back $1.50.  And so, oil lives another day.  It was looking pretty touchy yesterday folks. But today, the sun has come out again, the sky is blue, the weather is here, and I wish you were beautiful, to borrow a line from Jimmy Buffett!

The amount of supply around the world in oil is staggering, and the oil producers just keep pumping more and more.  Last week, OPEC decided to lift the quota/limits for each day’s production, wink, wink. In other words, “have at it boys, open the spigots and go to work”. Well, just like when the U.S was printing money by the truck load, and the dollar’s value dropped, with oil producers pumping to their little heart’s desire, oil’s price value has dropped. Too much of something doesn’t always work out for the best, eh?

So, what’s gotten into the currencies for the most part this morning, for instance the euro is up 1/2-cent and has climbed back over the $1.09 figure. Well, from what I read and can figure out, this is a case of: there just isn’t any reason to sell the euro right now, given the European Central Bank (ECB) meeting was last week, and now it’s just a case of watching data, and with that in mind, there’s not much data today around the world!

The petrol currencies are firmly on the rally tracks, led by the Norwegian krone, and the Russian ruble, which are neck and neck in the lead this morning.  The other petrol currencies file in behind those two. The Brazilian real, Canadian dollar/loonie, Mexican pesos and U.K. pound sterling all have varying degrees of gains being carved out VS the dollar this morning.

The Canadian dollar/loonie brings up the rear with regards to price moves this morning. There was some discussion in Canada about negative rates and Bank of Canada (BOC) Gov. Poloz speaks today. He’s got to be frantic about the drop in the commodities and oil, and what that’s going to do to the revenue generation for his country. And this is where I think Poloz shows his true colors and begins to grease the tracks for lower rates.  They’re coming folks, and then the BOC is going to play a game of limbo to see how low rates can go.

Well, it sure does look like the experiment with negative rates in Europe is going to be spreading to this side of the pond.  I read yesterday that Canada is looking at how it appears that the European countries with negative rates are having success with returning inflation to their economy, and how they could implement negative rates in Canada.

And don’t look now, but in essence, rates have been negative here in the U.S. for some time. Just last week the U.S. issued T-Bills at 0% yield.  When you take into consideration the fact that inflation as measured by the PCE is 1.3%, that means those T-Bills have real interest of negative -1.3%…

The negative rates are not on deposits yet. But come on, do we really think that just because the Fed has the runway cleared for liftoff of interest rates next week, that they will be able to keep those rates at those levels?  Well, I don’t think so. And that’s that! Furthermore, this negative rates experiment going on in Europe, is just a testing ground to see how depositors react.  I think this experiment has longer tentacles than what’s being exposed right now, and they could eventually reach to a ban on cash. But that’s conspiracy stuff, and I’m not allowed to talk about that any longer… But brother if I could!

Well, the New Zealand dollar/kiwi is down about 1/3rd of a cent this morning. The long awaited Reserve Bank of New Zealand (RBNZ) meeting takes place tonight. I told you earlier in the week that the thought here is that the RBNZ will cut rates.  I’m still holding out and saying that a rate cut only adds gas to the fire that’s going on with house prices in Auckland, and that the RBNZ needs to take a page out of the book by their kissin’ cousin across the Tasman, the Reserve Bank of Australia, (RBA) who saw their Gov. Stevens say that it was time to “chill out” with monetary talk, and that they should enjoy Christmas and then come back after the new year, and see if monetary decisions need to be made.

The Aussie dollar is also down by a smaller amount than kiwi, but down nonetheless. Here, the markets are taking a negative view of the labor report for November which is to print tonight. Recall that in Rocktober, Aussie employment surged by 58,000, and the markets are taking the view that the Rocktober number will  be revised downward, or the November number will be much smaller, and for that indiscretion the A$ must pay! HA!   These guys are so fickle, and sometimes act pretty strange, I must say. The Rocktober report is two months ago, let’s move on here folks.

Here in the U.S. I know I keep harping about how weak or “not strong” the U.S. economy is, and is in no way, shape or form ready for a rate increase, and you’re probably sick and tired of hearing me go on and on like the Energizer Bunny on this subject, especially since it appears beyond the shadow of a doubt that the Fed is going to hike rates any way  next week.  But I thought that this data played nicely in the sandbox with what I’ve been telling you…

The Non-Farm Small Business Optimism index dropped in November from 96.4 to 94.8. and the drop was led by a slippage of expected sales. Hmmm…  Small U.S. Businesses are not optimistic about sales.  What does that tell you about the economy right now?  So, for all of you that are tired of me going on and on about how the economy isn’t “strong enough” for a rate hike, here’s some more fuel for my fire.  How do you like me now? HA!

I did see some data though that is encouraging for the U.S. worker, and that is Compensation plans rise to a 9-year high.  Well, I’m from Missouri, so they are going to have to show me higher compensation.  You see, just because someone has “plans to do something” doesn’t always mean that those plans come to fruition. And if the U.S. economy goes the way I see it going, these plans will be hitting the circular bin around spring time.

To follow up on that sour note about the small business optimism… And that got me thinking about other stuff. First of all, how many of you recall me telling you late last year that the U.S. was going to suffer a liquidity crisis this year?  Yes, I know 2015 is about over and we haven’t had the liquidity crisis yet, or have we? Or will the supposed done deal Fed rate hike going to be the trigger for that liquidity crisis?  It could very well be just that!

So, we could very well still see this liquidity crisis and trust me on this folks. it won’t be pretty.  I was reading a piece yesterday by an analyst named Bill Holter, and he said this about the Fed:

…they originally treated a “solvency” problem with more liquidity and it has now morphed into a far bigger solvency problem. Only this time as liquidity is also lacking, they do not have the tools (collateral) to create the needed additional liquidity.

I don’t know where, when or how it will begin, but it’s just a feeling that I have about liquidity in the markets. Maybe I’m all wrong, and will have to come back and eat some humble pie.  Well, we’ll cross that bridge when we get there!

So, getting back to the what’s going on here in the U.S.. The U.S. Data Cupboard is empty again today. We’re going to have to wait until Friday before we see some “real data”, and that’s when November Retail Sales will print. And once again my check with the BHI indicates to me that Retail Sales will be just OK, and really kind of disappointing for this time of year.  But that’s on Friday, two days from now, we’ll have to hold our horses until then for some data, that will give us some direction for the markets.

It does seem that more and more on these days when the Data Cupboard is basically empty, that the dollar gets sold, for the most part. No props, no support, and no funny reports, lead to dollar weakness. Now imagine if the props like the Fed Rate hike, the support like price manipulation, and the funny reports, like the Jobs report, were all taken away. What would be left is a dollar without any clothes. You know the Emperor has no clothes. that’s how I look at this whole scenario folks.

Well, gold has added about $3 to its value this morning. Yesterday, gold was able to turn the small loss early in the morning to a gain on the day. But these moves have been tiny compared to the moves we usually see in the shiny metal.  I read a report on the Bloomie that talked about how the gold market is becoming “dull”, as investors look to higher rates. Really? I shake my head in disbelief.  But, if that’s what they think, then fine. I’ll take “dull” as long as the moves go both ways.

This is a good one folks, for it’s one of the more influential Fed Members, James Bullard, calling the Fed out for their wrong calls in the past.  You can read the whole thing here, and here are the snippets:

Inaccurate Fed forecasts of growth, employment and inflation have pulled the central bank in conflicting directions, and driven the decision to keep rates low for so long, St. Louis Federal Reserve President James Bullard said on Monday.

Over the last year and a half the Fed has had a “hat trick” of forecast misses, Bullard noted, with a too-optimistic outlook for growth and a rebound of inflation to the Fed’s target, and a too pessimistic view of how fast unemployment would decline.

In setting policy, the misses on gross domestic product and inflation appeared to be given more weight, leading policymakers to keep rates near zero even as the economy neared full employment.

“The negative surprises with respect to real GDP growth and inflation carried more weight during this period than the positive surprises on labor market performance,” he said. Bullard, who acknowledged that his St. Louis Fed also missed on key points like an expected return of inflation this year, has pushed for a rate hike partly on the grounds that the economy was approaching full employment.”

Chuck again. OK, two things: the first is recall last week I said that I wanted to question Fed Chair Janet Yellen and ask her why we should be confident that her call for higher inflation next year would be correct given their track record, and second,  I don’t know how many times in the past couple of years that I’ve gotten “spoken to” about me questioning the Fed’s calls. Well, looky here, James Bullard himself, admits that the Fed has been wrong on more than one occasion…

That’s it for today. I hope you have a wonderful Wednesday!

Regards,

Chuck Butler
for The Daily Reckoning

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