Well… what a strange day yesterday in the markets… The U.S. data wasn’t exactly fun and games, or as Al McGuire used to say… It’s not all seashells and balloons… But traders reversed their dollar shorts, and the currencies and metals headed down for most of the day, but late in the day, they turned on a dime. The euro, for instance, had fallen below 1.25, but ended the day well above the 1.25 handle… And Gold, which fell $8 at one point, rallied back… And all the other currencies fell into place…
I saw a headline as I was preparing to organize my thoughts for today’s letter, that said, Chinese renminbi/yuan finished stronger VS the dollar for the 5th consecutive week… yes, I know, you need a microscope to see the moves, as they are so tiny… But what other currency can boast that they have gained on the dollar for 5 consecutive weeks?
The Big Boss, Frank Trotter, was organizing his thoughts regarding a presentation for the Casey Conference in Carlsbad next week, and wanted to know, “what’s the ONE currency investors should own for the next 10 years?” Ahem, I cleared my throat, and said… Frank, I can’t give you just one, the legal beagles won’t let me do that! But I can give you three that should be viewed in that light… China, Norway, Canada… This is just my opinion and I could be wrong, and… let me be clear, this is just a discussion, I’m not soliciting to anyone to buy these currencies!
So… today is the Big Day, everyone has been waiting for! Big Ben Bernanke’s Jackson Hole speech… I still believe that he’s going to leave a very sour taste in the mouths of those that are wishing, and hoping and thinking and praying that Big Ben will throw them a stimulus bone… I’ve made myself perfectly clear that I believe that the stimulus announcement will come at the Fed meeting on 9/12… string them a long for as long he can… that is, the markets and Big Ben…
The euro is really pushing the envelope this morning and has rallied ¼-cent, while I typed the first couple of paragraphs… I’m sure that’s the “Big Ben will announce stimulus today” campers wanting to get euros cheap before the speech… That just means that when he disappoints them once again, that the turn-around in the euro could be quick and have a lot of downward movement… The event risk is definitely to the downside today for the currencies and metals…
OK… I mentioned above that the U.S. data yesterday wasn’t anything to get excited about… Unless you’re the U.S. Gov’t and you love to see that Personal Consumption number heading higher!
Well… once again U.S. consumers spent more than they made in July… Where have all the intelligent people gone? Long time passing… When will they ever learn, when, will, they, ever, learn? Sure consumers can do this for short periods of time, it’s how the economy moves… But to do it month after month, just brings us back to 2007, right before the financial meltdown… I don’t know how else to tell you that this will all end up in tears… But, you, as Pfennig Readers know about it long before it happens, and in plenty of time to prepare…
And July Personal Consumer Expenditure (PCE) rose .4%, the markets were looking for a .5% increase… The Personal Income was .3%, With spending continuing to outpace Income, the savings rate is inching down again… After reaching a low of 3.2% in Nov of last year, it steadily rose, but now is on its way back down again. Not having a treasure chest to tap into, is a scary thing… And once more, brings us back to 2007…
And yesterday, I said that I thought the Weekly Initial Jobless Claims would remain around 372,000… The printed at 374,000… the previous week’s 372,000 was revised down to 370,000, so the increase last month was 4,000… not huge… but if you look at the increases since hitting a low of 352,000 per week in July (remember that? The Gov’t officials were all over the lapping dog media claiming that jobs were coming back) the trend is not good…
Enough on this darn economic data… while I could spend most of the day talking about it, I don’t want to! It begins to bore me, and if it bores me, I can only imagine how it begins to bore you!
My good friend, and long-time colleague, Chris Gaffney, who is on the investment committee for our Wealth Management Division, had a nice long conversation with a reporter yesterday about Emerging Markets… Chris’ talking points were exactly what I would have presented, so we’re singing from the same song sheet… The Emerging Markets (EM) have been undervalued for some time, as most investors never even notice them. The EM don’t have the debt structure of the Western Civilizations… And we can expect more growth from these EM countries for the years to come.
I had a Pfennig Reader send me a note yesterday, telling me that he loved the idea of the Emerging Markets MarketSafe CD, but wasn’t thrilled about the length (5 years) of the CD, and wanted to know why we couldn’t do a 1 or 2 year MarketSafe CD… Ahhh grasshopper, come, sit and listen… It’s all about the cost to hedge the transaction. Giving a transaction with 100% Principal Protection, but allowing potential gains to be made should the underlying asset increase in value, requires a “hedge” to take the risk off our books… Since the financial meltdown of 2008, these costs to hedge have gone through the roof, so, and believe me if I had my way, we would offer 2 or 3 year MarketSafe CD’s, but… the cost to hedge has to be spread out, and by doing this, we get to 5 years…
Years ago, we used to issue Gold & Silver MarketSafe CD’s… 5 years… those 5 years went by fast, and when the CD’s came due, the returns were very impressive… But after 2008, we tried to do 5 years, and the cost pushed the maturity out to 7 years! I turned the Gold & Silver MarketSafe CD’s off at that time… So, now you know!
Yesterday… Canada saw some very damaging data and quite frankly data I was not expecting to see in that light… Canada’s 2nd QTR Current Account Deficit widened by C$5.9 Billion to C$ 16 Billion… The report exposed deterioration in the nominal goods balance… The Trade Deficit reflected weak export growth, and robust imports gains… After the report printed, I waited for what I expected to hear… That the Canadian dollar / loonie was to blame for the weak exports… Remember a week ago, I told you that the Auto Workers were complaining about the strong loonie… Well, now they have the ammunition! But, you can’t have your cake and eat it too… If the loonie gets weaker to make exports more attractive, then inflation takes over… So… pick your poison… a Weaker loonie is not the answer…
I just saw the “flash” inflation reports for the Eurozone… It appears that the higher Oil prices are pushing Eurozone inflation higher… Eurozone inflation at first look for this month, printed this morning at 2.6%… that’s up from July’s 2.4% print… Remember when I made a big deal out of European Central Bank (ECB) President, Mario Draghi, cutting interest rates, while inflation was above the 2% target? Well, if he did then, he’ll probably do it again when the ECB meets next Thursday… I doubt the markets are getting a sniff of this rate cut yet, so, you, dear reader, are ahead of the markets!
You know… the once lofty figures that the Aussie dollar (A$) held, are in the rear view mirror… the A$ has lost 2-cents in the past two weeks, and I’m seeing lots of calls for the A$ to fall back to parity with the U.S. dollar, which would be another 3-cent loss… But… what about the stimulus that China is beginning to inject into their economy? What about the bounce that could come from an announcement of additional stimulus in the U.S.? Well, those are just circuit breakers for the A$, as it is going, according to market gurus, back to parity… But remember what I tell you all the time… The A$ at $1 is STILL a strong currency!
So… did you hear about the Gold smuggling going on in India? This is a great story, and goes to show you how important Gold is to the people of India… Here’s a snippet of the story… “As gold prices have hit the roof in India, an unprecedented increase in the smuggling of the precious metal is being witnessed. Indian authorities are seeing a spike in undeclared gold being smuggled into the country.
The Directorate of Revenue Intelligence recently detained two airport personnel who allegedly helped smugglers take contraband gold out of the Mumbai international airport.
The Directorate has seized 5.5 kilo of gold in this instance and another 4 kilo just two days ago. In mid-August, the Directorate arrested a person at Jaipur airport with 2.5 kilograms of gold hidden in his socks. Investigations revealed that the accused had smuggled gold over 20 times in the past few months alone.”
I always talk about the demand for physical Gold that we see on our metals trading desk… wait… the Graham Nash song: I Used To Be A King just started playing and the first line goes… “I used to be a King, and everything around me turned to Gold”… How appropriate! OK, back to physical Gold demand… Imagine, if you will, that Gold supply ran out… what would happen to the price of Gold then? Well, supply isn’t going to run out any time soon, so no worries there… but if everyone in the world accumulated Gold like the people in India, and China… it could happen!
So… what will Big Ben talk about today? Well… I really don’t know, as he doesn’t confide in me or give me advance looks at his speeches… But.. If I were Big Ben Bernanke, what would I say? Ahhh… that’s a good one! Let’s play this game, eh? Ok… this is Chuck and he’s Big Ben today… “Well, folks, the economy sucks eggs! And if you think this is bad, wait till the next quarter and the first quarter of 2013. We’re out of tools… We tried… but failed miserably… But don’t blame us! The lawmakers and President haven’t exactly made our job easier, and I have to tell you that my Central Banker friends around the world aren’t too happy with our 61% participation in Treasury Auctions last year, so… either the Gov’t stops spending what they don’t have, or we’ll have to back away from the Auctions… But just for fun, we’re going to keep rates near zero through 2014, so chew on that! And I thank you for your time today…
Then There Was This… Last week, I told you about my former colleague (Rob Foregger) and his group of people that are doing what they can to get the U.S. Gov’t to fix the debt… The U.S. Gov’t doesn’t know what they’re up against here, because I do! I worked with Rob, he is a very persistent worker, and one that will question every single thing that’s said… So, I exchanged emails with Rob the other day, and he wanted me to give out the new link to sign the petition to kill the debt… so, here it is, folks… www.fixthedebt.org
Hey! We’ve got to start somewhere! We can’t depend on lawmakers to make the right decision, but if they have a template to work from, maybe we can begin to take chunks out of the National Debt, which you can see by clicking on the link at the end of the currency round-up, but should you want to know now… It’s nearing $16 Trillion..
To recap… The currencies lost ground most of the day yesterday, only to turn-around by the end of the day, and then carry through in the overnight sessions. This morning, the euro is pushing the envelope of 1.26, but the event risk is all to the downside today, as most of the gains this week were the work of the “looking for additional stimulus campers” China posts a 5th consecutive week of gains VS the dollar, and the A$ could be headed to parity…
Chuck Butlerfor The Daily Reckoning
Chuck Butler is President of EverBank
Hey Chuck, regarding this comment of yours … “my Central Banker friends around the world aren’t too happy with our 61% participation in Treasury Auctions last year” … I’d love to hear more about that. I just saw a similar comment this week from my own local central bank governor (Alan Bollard) to the same effect:
“There must be ways we could incentivise better exchange rate practices in countries and put boundaries on acceptable behaviour.”
How much pressure can foreign central banks/governments exert? Should we expect to see this as a moderating influence on the (unstated) policy of inflating away US government debt?
Given a choice, Bernanke will likely strangle the currency (your money)... in favor of “strengthening” the economy.
Eventually, economic reality and markets will collide -- unfortunately, the higher the market, the harder the fall.
How certain business practices wind up jacking up costs before sticking you with the bill.
The Japanese Nikkei fell flat on its face overnight.
While Bernanke Runs Wild, Let’s Talk Ponies