Norges Bank Cuts Their Interest Rate

And now… today’s Penning for your thoughts…

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

Well, yesterday, we started off with the news of a weak PMI in China. And today, unfortunately, I  have to start off with the Big News overnight, and that is that Norway’s Central Bank, The Norges Bank, cut their base rate 25 Basis Points (1/4%). And Norges Bank Gov. Olsen, said that there could be more coming. UGH!

Norway needed to do something to boost their revenues given the drop in the oil price this past year, and I guess Olsen just hasn’t learned anything from the previous countries that have dropped interest rates so low. It sure hasn’t helped turn their economic growth around, and it probably isn’t going to help Norway either! What Norway needs is not a rate cut, or a promise to cut more, it needs the price of oil to recover, period!

So, the Norwegian krone has dropped to a weaker level then it’s neighbor, The Swedish krona, and that means that the krone is now at a 13-year low! OUCH! 13 years ago, the dollar was ending its strong trend that began in 1998, and the currencies were on their way to a 10-year strong trend, that took the currencies to levels that they had never seen before, and haven’t seen since.

It’s time for me to raise the white flag, and admit that that this dollar run, which has been going since July 2014, is a strong dollar trend. I really never thought this would happen again, given the debt, and the problems in the U.S. economy. And it disproves something that I’ve preached for years, and learned from traders when I was a young man learning the business, back in the stone ages. And that is a trend begins for a fundamental reason, and doesn’t end until that fundamental reason is at least on its way to being corrected.

The fundamental reason the dollar entered the weak dollar trend in February 2002, was that it’s debt had grown to a level that indicated that a currency crisis would follow. Well, our debt is still growing, but. I guess not at the same pace as it was, and that represents in some strange way a correction of the fundamental.   I would prefer to think of this dollar strength, as “non-fundamental”, but more as a “soft dollar rally using smoke and
mirrors”.

I’m still not ready to call it a multi-year strong dollar trend yet, even though this dollar rally has lasted more than a year now, because the Dollar Index, which today is 95.97 is a very long way from the levels the Dollar Index held during the last real strong dollar trend. In July 2001, the Dollar Index reached 121!  Now that’s dollar strength!

So, this “soft dollar rally using smoke and mirrors” has the conn.  But for how much longer, I hear you asking.  Ahhh grasshopper, have you not been paying attention in class?  Didn’t I tell you that I see the U.S .economy falling back into a recession probably the 1st QTR of next year, and when that happens the Fed will panic like they always do, and jump to implement QE4, and when that happens, the trap door springs on the soft dollar rally using smoke and mirrors.

And speaking of debt causing problems for economies. Thanks to my friend, and publisher extraordinaire, Bill Bonner, I have this little ditty to share with you today, regarding global debt.  Global debt levels are at a record high. According to a recent report by McKinsey, total outstanding global debt topped $200 trillion as of the second quarter last year. That’s a $57 trillion increase from pre-crisis levels. Here’s Bill:

When debt is so high things tend to go wrong. Many investments and speculations – financed with debt – don’t work out as planned. Debtors can’t pay. Creditors panic. And investors – whose assets were priced for perfection – head for the exits.

I can’t believe this whole discussion began because I mentioned 13 years ago!  So, it’s another day of mixed results in the currencies, with the Swedish krona outperforming the other currencies vs. the dollar, and the euro-wannabes, Poland, Hungary, and Czech Republic still on the rally tracks this morning.

The Russian ruble is rallying vs. the dollar, which is strange given that a recent survey indicated that the Russian economy would contract -4.4% in the 3rd QTR this year. With the second QTR also negative at -4.3%, The Russian economy is in a world of hurt. But they have this huge interest rate differential that keeps the interest in the currency coming and going.

The euro is clawing back some of its losses of the last couple of days, and has climbed back to above the 1.12 handle. This morning German Confidence as measured by the think tank IFO, printed a nice strong number, with the Sept IFO printing at 108.5 vs. a forecast for 107.9. Of all the think tank reports from IFO and ZEW, this report carries the most weight, I believe, and is evidenced by the strong move in the euro this morning.

In addition, I saw something from the Eurozone that I said to myself, “Now that’s what the Eurozone needs!”  What I saw was a report that ECB member, Nowotny, said in an interview that “the ECB’s bright spots could offset Asia Risks”..

I like this Nowotny guy. He’s the Gov. of Austria’s Central Bank, and just saying that gives him credence, right?  Well, Nowotny is one of the European Central Bank’s (ECB) members that don’t believe that more stimulus should be implemented. Good for him!

And this just in from the Eurozone. Eurozone banks borrowed just euro 15.48 Billion in the 5th Targeted Long-term Refinancing Operation (TLTRO). The markets had forecast that the banks would borrow euro 70 Billion.  This brings the total of the 5 Operations to euro 400 Billion.  I see this with two lights. the first light is a red light, that the ECB’s balance sheet grew by euro 400 Billion, and the second light is a yellow light that there are still 3 more Operations to come.

I did like that the demand from the banks was lower than forecast, but it’s still quite an operation and one that I don’t like!

Well, gold is up a few bucks today. Which I look at and think,  what could be.  Oh well,  gold ended up $5 yesterday, so that’s a good thing in my book.

Yesterday, I talked about the big jump in the price of Palladium. Well, I finally found out that it came courtesy of an announcement in China that they are going to curb auto emissions. Which means making catalytic converters stronger, which would mean the need for more Palladium!

Our precious metals guru, Tim Smith, sent out an email to the desk yesterday telling them that “Silver coin products are virtually sold out with most of the wholesalers. Premiums on Silver Eagle coins has shot up to $5 per oz.”  And that got me thinking… Wasn’t it me that warned everyone last year that we would see a Silver shortage this year? Why yes, I do believe it was you, Chuck! I pointed to the increased demand for Silver in the use of Solar Panels, and then pointed to the increase implementation and use of Solar Panels.

Now, this also brings me back to something I’ve said in the Pfennig for years on years, that my dad taught me when I was young.  That there’s no such things a shortage, it’s merely something that’s in need of a price adjustment. Well? Where’s the price adjustment in silver?  Come on you naysayers that don’t believe in price manipulation, give me one good reason why the price of silver isn’t adjusting higher and higher in the face of this shortage. Come on. I’m waiting…

Well, the U.S. Data Cupboard, had the Markit PMI (manufacturing index) for us yesterday, and it printed bang on with last month’s number of 53, still above the expansion/contraction figure of 50, but as I’ve shown you previously this index is down from a year ago, a steady Eddie decline.  So, while we’re at it… I also showed you yesterday that China’s PMI was 47, which is not good. And then later yesterday morning, the Eurozone PMI was 53.9 down from 54. No big shakes considering that Germany actually printed a softer PMI!

Today’s Cupboard will have Durable Goods Orders for August.  And I truly expect that this data will print negative once again, after a +0.2% print in July.  The U.S. economic engine is still missing and in desperate need of a tune-up.  And that my friends is the reason there’s no inflation, there’s no wage inflation, the labor numbers are smoke and mirrors, and why the Fed couldn’t hike rates.  Debt, does strange things to economies. Just ask Japan.

Longtime readers will recall me singing the old MTV song by the Vapors, I’m turning Japanese, yes, I really think so, back in the day, when the U.S. began accumulating large debts each year, and then began cutting interest rates, and adding stimulus, (recall cash for clunkers? Or the $700 billion cash grab?) these things all reminded me of the early days of the Japanese decline.  And why did Japan begin to have problems?  Too large a Debt.  And then instead of just allowing the economy to work out the problems, the Finance Ministry and the Bank of Japan (BOJ) began these stimulus measures.

Well, now skip ahead 5 years or so, to now, and I really think that we’re turning Japanese more today than before.  It’s now been nearly a decade since we hiked interest rates. 10 years ago, it was 10 years for Japan! Our debt just keeps growing, and there’s nothing or no one that will stop it!

And then there’s the Bond King, Bill Gross, speaking about zero interest rates. Let’s listen in for the fun of it:

Mainstream America with their 401Ks are in a similar pickle. Expecting 8-10% to pay for education, healthcare, retirement or simply taking an accustomed vacation, they won’t be doing much of it as long as short term yields are at zero. They are not so much in a pickle barrel as they are on a revolving spit, being slowly cooked alive while central bankers focus on their Taylor models and fight non-existent inflation.

Well, today, with the mood I’m in, I was looking for something that would really light the fire, something sexy, or something that would get me into trouble for this section. But, I’ll have to settle for this, that I found on Ed Steer’s letter and he directed me to the article on the NY Times that can be found here, and here are the snippets:

Just a day before the arrival of President Xi Jinping here for a meeting with President Obama that will be focused heavily on limiting cyberespionage, the Office of Personnel Management said Wednesday that the hackers who stole security dossiers from the agency also got the fingerprints of 5.6 million federal employees.

The attack on the agency, which is the main custodian of the government’s most important personnel records, has been attributed to China by American intelligence agencies, but it is unclear exactly what group or organization engineered it. Before Wednesday, the agency had said that it lost only 1.1 million sets of fingerprints among the records of roughly 22 million individuals that were compromised.

Chuck again. Well, isn’t this just peachy dandy! It’s the U.S. government that got hacked folks! You know that same government that’s supposed to be looking out for us.  I really don’t care who hacked it, but more that it was hacked, doesn’t that just give you the willies?

That’s it for today. I hope you have a Tub Thumpin’ Thursday!

Regards,

Chuck Butler
for The Daily Reckoning

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