A Sense of Optimism Sets In For Greece

Today’s Pfennigfor your thoughts…

Good day, and a marvelous Monday to you!

I had a lot of time to read and think about stuff this past weekend, and basically what I came away with was a stronger conviction that the U.S. is heading for recession.

Basically, I don’t believe we ever really left the recession of 2008, but according to the NBER, the folks that officially call when a recession begins and ends, it ended 6 years ago, so this would be a new one in their eyes, and those of the markets, and Fed, who bought into the end of the recession thing 6 years ago.

So, remember playing whiffle ball? When we played you got two strikes, that is unless the catcher caught the ball on the first swing and miss, which meant you were out!  But if the first swing and miss was dropped by the catcher, you got another swing.

Well, the reason I bring that up is simply that instead of “it’s 1, 2, 3 strikes you’re out” as in the song, it’s 1, 2 strikes it’s a recession — the strikes being quarter negative growth prints of GDP.

The U.S. already swung and missed with the 1st QTR, but the catcher dropped the ball. So, it appears to me, and this week will be more confirmation, as negative durable goods will print for the 3rd consecutive month, that the 2nd QTR will print negative.  Just like the first QTR.

So much for the 1st QTR’s negative growth being a result of bad weather, as the Fed and others would have you believe. Oh, and this week’s data cupboard will bring us the final revision to 1st QTR — as if it’s going to turn from negative to positive. Well, now that I say that, I guess it’s not out of the question, you know the games people play now.

I guess this is a good place to bring up the fact that last year, the government added another adjustment to GDP, when they decided that the current GDP reports at that time were not meeting up to the standards the government expected for them to be, and decided that research and development, art, music, and film royalties needed to be added.

It was said at that time that this would add up to 3% annually to GDP.  Now, we could get into why I think these additions are ridiculous, but I won’t, as that would take up all our time today, but I will leave you with this parting shot: the government decided that research and development would no longer be treated as an expense, but instead as an investment.

What? What? Isn’t research and development merely an expense, like the electricity bill? And the other stuff is intellectual property… how can you account for that? Oh, well, it seems to me that it was just a boondoggle to make GDP have more curb appeal. But, while we’re on the subject, imagine, if you will, what the GDP numbers would look like if the government hadn’t made another hedonic adjustment to GDP last year.

Well, we’re getting down to the cheese that binds for Greece, as they have 8 days left to make a deal or not. There were tons of stories this past weekend about how Greece has decided to leave the euro. But don’t take that seriously, yet, folks. Greece is just using that as a negotiating tool — it’s about the only one they have in their quiver.

In fact, most of the reports this morning are saying that there’s a greater sense of optimism, which makes abundant sense given where we are on the calendar..

So, with the greater sense of optimism in the air, the euro is hanging in there, and was up just a bit this morning when I came in. But at this point, it’s just sitting there, flat on the day. In fact, most of the currencies are flat to down this morning, and China is not participating today, as they celebrate the second day of their Dragon Boat Festival.

Gold is getting sold, and is down $6 as I write. So, as I write, the euro is flat, and the Canadian dollar/loonie, along with the Russian ruble, and Indian rupee, appear to be the only currencies with gains vs. the dollar this morning.

Speaking of China, when they come back to work from their celebration, they will print their flash PMI tomorrow. For those of you who could use a refresher; all the countries have PMI’s, which stands for Purchasing Manager’s Index.

It’s really a manufacturing index that uses the 50 number as the middle, a number above 50 represents expansion, and a number below 50 represents contraction. The U.S. changed the name of their PMI a few years ago, as they couldn’t just be like everyone else, to the ISM, but it’s all the same thing.

The last couple of months, China’s PMI has been below 50, but after hitting a low a couple of months ago, the index number has been rising, and could print tomorrow right at 50, or just a smidgen below 50. At least it’s heading in the right direction, folks, as opposed to what’s going on in the U.S. with their ISM data.

I keep reading stuff that has me scratching my balding head about how the U.S. economic data is “stronger”.


You know when you trade with blinders on, you only see what you want to see. And that’s what’s going on with these guys that keep touting a stronger U.S. economy. They point to labor as their proof, and if any of those guys ever did that to me, I would begin my tirade about how the labor data is trumped up, and the real unemployment rate is 23%!

But oh well, let them make their mistakes.

Late last year, I was still out on the trading desk, and having a conversation with a trader friend in NYC. She asked me what I saw for the markets for 2015, and I told her, that I saw a liquidity problem that would probably bring the Fed back to the bond buying table. She asked me what are the signs that will tell us a liquidity problem is rising. And I said, well, one of the things to look for are people in the markets talking about a lack of liquidity.

So, let’s think about that for a second. Remember a few weeks ago, when I told you that in the letter I received from Agora that was penned by James Rickards, they featured a conversation that Rickards had with an “inside the bond market guy” who told Rickards that liquidity right now is worse than most knew.

Then Bill Gross, the bond king, said in Bloomberg on April 29, 2015, that he “sees no liquidity in bonds”. And now today, on the Bloomberg there’s a report that caught my eye.

It’s title: Three Words Count in Bond: Liquidity, Liquidity, Liquidity.  The story was really about a lack of liquidity around the world. So, it wasn’t the droid I was looking for, but it’s still true. Liquidity isn’t important, until it doesn’t exist. So, let’s keep any eye on this continuing story, for it will be HUGE, should it really come to fruition.

The price of oil is back to $60 this morning. So, it appears that a range of $58-$62 for the price of oil is what we have going on right now.

The bad thing about that is that the currency traders no longer feel that a move above $60 is going to keep going. Therefore the small move isn’t reason to begin marking up the petrol currencies, for the price of oil most likely will lose its steam in the next day or two.

So, the price of oil needs to break above $62 for any meaningful notice from the currency traders to take place.

I told you last week that the U.S data cupboard would get restocked this week, but that’s not all the week has in store for us.

The U.S. and China are getting together this week for their 7th Strategic and Economic Dialogue. I like how the Bloomberg described this, “The two countries will have no trouble filling the agenda. The challenge will be finding topics on which they can agree.”

It will be interesting to see just how strong the complaints will be from the U.S. For my money, I would think the U.S. would be timid about their complaints, as the Chinese, even though they have been reducing their Treasury holdings, are still a very large holder of Treasuries.

The “lucky loonie” as I’ve been referring to it lately, is one of the few currencies with gains vs. the dollar today. The lucky loonie, has been quite stealth-like with its recovery in price lately, but nothing surprises me any longer with regards to the loonie.

Basically, the way I look at the lucky loonie is like this; Canada is a major economy (G-7 member) with sound fundamentals, and a strong banking sector. Canada benefits from strong capital inflows, has raw materials that other countries want and need, and do not have the demographics problems that other countries are staring down the barrel of right now.

You know, I’m usually on the side of the fence that says that the U.S. has too much debt to be able to generate much of anything else that’s positive. But obviously, there are some institutions out there that let the amount of debt hanging over the U.S. like the Sword of Damocles bother them. So, in an attempt to be fair and balanced, I thought I would share one of those institutions’ thoughts. Let’s listen in on Barclays:

Overall, we think the US dollar will continue to be supported in the medium-long term, as it is the currency of the country most-capable of generating inflation and closest to beginning to normalize monetary policy.

Of course this is where I would cut in, and remind these guys that they’ve been saying this kind of stuff for many months now, and have the Fed “normalized monetary policy” yet? Of course not. and they won’t, in my opinion.

Oh, and my good friend Dennis Miller, writes for MarketWatch, and points out, “Zerohedge got the ball rolling with ‘About those Rising Wages: Real Hourly Earnings Drop to Lowest in 2015′”.  The advocates of a rate hike say “wage growth is just around the corner”.  It’s a fantasy, “What they don’t touch on is facts,..not only is nominal wage growth for over 80% of the labor force barely above recession levels, and in a clear downtrend…(and conclude), “hourly earnings, which in May just dropped to $10.53, indicating zero real wage growth and in fact, the lowest real wage number of 2015.”

Yikes. No wage growth? What are we going to do? “Oh well, the economy is getting stronger, so that’ll take care of itself,” I can hear these guys saying.

Hmmm, we’ll see, won’t we?

The U.S. data cupboard slowly works its way back today, starting with existing home sales for May, a teaser if you will, because tomorrow things in the data cupboard begin to heat up, with durable goods orders for May.

So, make certain you come back tomorrow, same bat time, same bat channel!

I told you above that gold was down $6 this morning, and nothing has changed there in the past couple of hours, as I put together the letter. And that doesn’t bode well for gold’s ability to rally back today, given that when the NY traders come in and see that gold is down, they’ll probably take that as their cue to go ahead and whack it some more. Since it was already down, who would notice then?  I know, that’s not an upbeat thought for gold today, but it is what it is, folks.

Since I was talking this morning about how, in my opinion,  we’re going to see a lack of bond liquidity this year, this story caught my eye, and you can read the whole article here: http://www.reuters.com/article/2015/06/19/investing-fundflows-bofa-idUKL1N0Z50OR20150619

The article goes on to show where all those funds are going. You guessed it! Stock funds!

Hmmm… sounds like a recipe for disaster to me. But what the heck do I know? I certainly don’t know any more than anyone else! They make me say that stuff folks, trust me, if we were on the Butler Patio, I would be telling you that I know best! HAHAHAHAHAHA!

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

Chuck Butler
for The Daily Reckoning

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

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