A Ron Paul Warning...

Today’s Pfennigfor your thoughts…

Good day…  And a Tom Terrific Tuesday to you!

Well, the euro was all “showing off” and pounding its chest yesterday, only to see it all to waste in the overnight markets.

Yesterday, I told you that there was a new sense of optimism regarding the Greek Drama, and as the morning went along, that optimism grew stronger, and the euro traded to 1.14 once again. That makes twice in the last week that the euro has pushed to 1.14, only to see it fall back below the figure, and not be able to move past with authority.

I’m told by more than one trader overnight that the euro fell back because of cleanout of positions and not because of any fundamental changes. But a fall back to 1.1225 sure seems to be quite overdone in my opinion, given that there was nothing “bad” that came out of the negotiations yesterday with Greece.

In fact, the Eurogroup summit that took place yesterday, ended last night with no agreement, but a lot of cautious optimism that one could be in place by the end of the week. Which means we have to deal with ups and downs, go and no go’s, all week.. UGH!

The euro wasn’t sold off because of bad data. Once again the Eurozone economic data points to a recovery for the Eurozone economy, as their latest PMI’s (Purchasing Managers Index) printed better than expected.

Yesterday, I explained PMI’s, so I won’t go there again, except to say it’s a pulse of the manufacturing sector, which is very important to a country’s/ region’s economy. In the Eurozone, their May PMI printed at 52.5  vs. 52.2 the previous month, and the composite index, which is a combo of manufacturing and services printed at 54.1 vs. 53.6 the previous month.

Darn good fundamental numbers for the Eurozone, and the euro should have rallied on that print!

Speaking of PMI’s, China came back from their Dragon Boat Festival celebration, to print their latest PMI, which increased, as I told you yesterday I thought it would. Chinese June PMI, printed at 49.6 vs. 49.4 consensus, and 49.2 in May, so, still below the 50 line in the sand, but trending in the right direction.

There was one component of the print that was concerning, and that was the employment sector which showed unemployment at the worst level since 2009. The Chinese government knows all too well that rising unemployment is something they cannot have, period, for it causes numerous problems that the government just doesn’t want to deal with.

Everybody, don’t worry, be happy…

But even positive overall news like this stronger-than-expected PMI print in China wasn’t enough to persuade the Peoples Bank of China (PBOC) to allow another appreciation to the renminbi/yuan. In fact, the whole currency screen that I have doesn’t show one currency with gains vs. the dollar this morning.

So, if it is all tied to a position clean up as it was suggested to me by more than one trader this morning, it must be a complete clean up, for there isn’t one currency that has gone unscathed this morning. And I mean not one, not even gold!

Speaking of gold, yesterday I told you that the shiny metal was down $6 but that with it being already down in the early morning trading that it didn’t bode well for when the NYC traders arrived. And that held true, as gold was pushed further down on the day once the NYC traders came in and saw an opening, and they ran through it like Sweetness, Walter Payton used to!

And today, the shiny metal is down another $2… UGH!… no wait! Double UGH, UGH!

Have you seen the TV commercials with the former Representative, Ron Paul, saying that he sees another financial crisis coming that will be greater than the one in 2008?

I always liked Ron Paul, for his Austrian Economics stance, and willingness to stand up to the Keynesians… so, it is with interest that I watch this commercial and see if he gives any clues as to why he feels this way.

Now while I agree with Ron Paul, that we will see a financial crisis that’s worse than 2008, from all the “funny stuff” we’ve done the past 6 years, especially not correcting what went wrong in the first place, I think I’ll stick to my own thoughts…

Well, how did you like my Special Sunday Pfennig, delivered Monday, on the Mexican peso?  I think I covered most of what I wanted to say, but did leave out something very important, and that is, that the peso doesn’t get the attention that it could and would if Mexico’s interest rates were higher.

I’ve always said, and longtime readers will recall me saying this previously many times, that because of Mexico’s past indiscretions with foreign investment in their country, that investors now require Mexico to pay what I call a “risk premium”. By that I’m talking about much higher interest rates.

If you want to attract investment, you need to take care of the investors, and you can do that in a few different ways, but always with much higher interest rates…

So, right after the Sunday Pfennig went out on Monday morning, Mexico printed their April Retail Sales, which declined unexpectedly.

April Retail Sales for Mexico declined -0.3% vs. March, leaving the annual increase at 4.6%. Still better on an annual basis, but is this April decline reason to be cautious going forward? I do believe that to be the case, which isn’t going to give the Mexicans any room to hike rates, and thus no ability to attract foreign investment.

It was announced last week that Zimbabwe had finally abandoned its currency because of hyperinflation. The African country will switch to the U.S. dollar, and several other fiat currencies.

That’s a shame, because it has been a staple at my presentations to show the hyperinflation currencies of the Reichsmark and the Zimbabwe dollar, as poster currencies for countries that used over issuance as a way to promote growth.

Have you ever seen and heard the Big Boss Frank Trotter or Chuck do a presentation on the failed currencies? It’s not to scare people from currencies, it’s only to point out that some of the greatest currency regimes, ended up failing because of over issuance, now that over issuance may be a result of wars, expanding military regimes, rising inflation, or just plain idiot exercises.

And  it’s one of the major reasons why I continue to believe that the dollar’s worst days are ahead of it.

Getting back to the euro for a minute… Bloomberg has a report this morning that former European Central Bank President, Jean-Claude Trichet, gave an interview and of course he was asked about the euro, and had this to say:

We were 15 (# of countries) in the euro when Lehman Brothers imploded. Not only are the 15 including Greece, still there, but four new sovereign nations have chosen to join… Austerity is not the word for Greece, which began with a deficit equal to 15% of its economy. It’s a gradual and ordered return to equilibrium.

I have to say that years ago, when Trichet was announced as the President of the ECB I was not pleased, for a French Central Banker would be taking over from the initial president of the ECB, Wim Duisenberg, who guided the euro though the depths of days following the issuance, the end of the sovereign currencies, and then watched the euro rise to challenge the dollar.

But Trichet did much better than I feared he would do, and now he makes a very good suggestion; that everyone stop calling it austerity, and instead call it a gradual and orderly return to equilibrium. That gets Tsipras off the hook with his “no more austerity” party, and voters, and allows the creditors to get what they need from the deal. Good Idea Jean-Claude Trichet!

I was looking through the latest Grant’s Interest Rate Observer letter, and while I’m not allowed to quote anything from his letter, I will tell you that the great James Grant uses a term in the letter that I think appropriately describes the U.S. economy:  “Stall Speed Economy”.

Pretty Good, eh? Says it all to me!

Well, across the world in Singapore, the country printed their May CPI (consumer inflation) and it printed at a higher rate than expected.

May Singapore CPI was -0.4%  year on year, vs. -0.5% in April and the consensus. Still not the kind of inflation the Monetary Authority of Singapore (MAS) would like to see to keep the trading band of the Singapore dollar as wide as they currently have it, but it did print better than last month, so maybe they can keep the band wide, and wait for inflation to rise further?

The sing dollar (S$) continues to be wrapped up in a very tight range, which is soft compared to where it was last year, and I’m sure the MAS is just fine with that. I’ve told you all before, but for those new to class, Singapore is one of the very few countries that use currency strength to fight inflation, instead of arbitrary interest rate swings.

So, while inflation in Singapore is negative, the MAS doesn’t mind if the S$ is soft, so as to promote inflation, but once inflation begins to build, the MAS will be quick to stop the soft S$.

Remember last winter (I know I sure do, and wish it were winter again! HA!), when I casually mentioned the attack on the Danish kroner’s peg to the euro? I kind of beat around the bush with a thought that the krone could be forced to convert to the euro before too long.

Well, it never happened, yet I had thought that since Switzerland decided to break their peg on the cross to the euro, that Denmark would follow soon enough.

I just don’t see how Denmark was able to fight off the pressure on the peg. But they did, and now the “all clear” horn has been sounded.

You want to know how Denmark held off the attackers of the peg?

Well, it was a direct result of the central bank Gov. Rohde, who introduced measures that would make holding kroner a losing trade, and the hedge funds and institutional investors who had the deep pockets to make this work, didn’t appreciate the measures introduced by Rohde, and so they took their ball and bat and went to look for some other peg to break.

The U.S. data cupboard begins to get restocked today, and first up on the docket this week, is U.S. durable goods for May.

I told you last week and again yesterday, that I expect this data to print negative once again. Capital goods orders will also print, and while it won’t be negative, it will print relatively weak. The existing home sales yesterday showed the rush to beat the rate hikes is still going strong, and today’s new home sales will too.

So, as long as you’re in the home selling business, things look good, but everything else, when you only count stuff once, doesn’t look so good. Stall speed economy…

For what it’s worth, I found this on MarketWatch this morning, and thought it played well with my “stall speed economy” thought. You can read the whole article along with seeing pictures here: http://www.marketwatch.com/story/there-are-the-states-that-still-havent-recovered-jobs-lost-in-recession-2015-06-19?siteid=nwtam

WOW! Notice that most of the states are in what they call the Rust Belt, but then there are those like Nevada that out outliers to the Rust Belt. To me, that means middle class jobs and manufacturing jobs. You know, the things that get our economy rolling in the right direction.

That’s it for today…

Chuck Butler
for The Daily Reckoning

P.S. The Daily Pfennig is first published everyday, right here.

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