Another Dollar Rally

And now… today’s Pfennig for your thoughts…

Good day, and a happy Friday to one and all!  

The dollar is back at the front of the class today again, which is putting the cart before the horse if you ask me, because the dollar is getting bought on the thought that U.S. Retail Sales, for April will be a blowout number, and put the rate hike back on the June Fed meeting’s agenda. A leap of faith is what I call this – when the markets get ahead of themselves and begin to think they know what’s going to happen, and trade accordingly. Shoot Rudy, April Retail Sales might be a blowout as they are anticipating, and then again it might not. So the risk in the markets today is the Retail Sales print.

And why would the markets think that this “one report” on Retail Sales that isn’t negative like most of the previous reports have been, either that or very disappointing, is going to be the key to a Fed rate hike in June? Because they are the markets.  They may not always be rocket scientists, but it sure doesn’t pay to take the other side of their trade. It’s always better to stand on the sidelines and let the markets figure out their mistake on their own, and then trade with them as they reverse their call.

Even the Brazilian real which had seen some very strong positive moves in recent weeks due to the pending impeachment, which is now a done deal, is feeling the dollar’s strength this morning. You don’t think that the Brazilian real traders woke up this morning and had a revelation that Rousseff is gone, but who’s going to take over? And are there any quick fixes to the Brazilian economy? The answer is NO! So all this unknown is hurting the real this morning, and I taught you many years ago, that Currency Traders don’t like “unknowns”.

In Germany this morning, their Flash first QTR GDP report printed and showed a nice increase from the previous quarter, printing at 0.7% vs. 0.4% in the previous quarter. But the euro has lost the 1.14 figure again, dropping to 1.1350 this morning. And as I look over most of the currencies and metals this morning, the dollar has their attention.

In New Zealand overnight, N.Z. first QTR retail sales printed, and should have been enough to underpin kiwi, through this U.S. dollar strength today, but that’s not so. UGH! First QTR retail sales for New Zealand printed better than expected at 1.0% vs. 0.8% consensus. Calmer heads will return to the markets folks. We just have to ignore this one-off day of dollar strength. And haven’t I told you we would see stuff like this, as an asset ends its time in a strong trend, like the dollar, it will have days where all the dollar bugs come out of the wallboards and parade around like they are 20 game winners, only to have to go back to where they came from in a day or two.

Gold got whacked again yesterday, this time by $13. And this morning it’s down another $3 as I write. Cheaper levels equal cheaper levels to buy. That’s how I look at this, because to me, gold is ready to go on a long strong run. Think about this for a moment. We have multiple countries currently with negative rates. We have multiple countries with as easing bias, which means they are cutting rates, and economic growth is nascent around the world. And then you have Central Bankers shouting from the rooftops that they need to take large bills out of circulation in their respective countries (the ban on cash). Now, add in that fact that we’re not just talking what’s going on here in the U.S. folks. People/investors around the world buy gold, not just U.S. investors. Need I say more?

The price of oil slipped back below $46 in the past 24 hours. The “high” from the supply numbers didn’t last too long for oil did it?  And well, this slippage in price below $46 has been nasty on the petrol currencies, with the Russian ruble performing badly overnight, and all the other members of this club falling in behind the ruble.

I would like to direct your attention to this next passage as I really get on my soapbox regarding debt. Here’ goes!

Debt is everywhere folks. I’ve said this before, but I think there are times when things need to be said again and again, until everyone, and I mean everyone, including those knuckleheads that still believe that debt doesn’t matter realize the error in their thinking. And that is that too much debt is bad for an economy. An economy with too much debt will not be able to grow because  the debt drains away vital resources from economic growth. 

But what do the mental giants in this country claim that we need to do? Issue more debt! Fighting debt with more debt has been a losing equation since the Great Recession (which never really ended in my opinion, but officially ended 7 years ago) and there’s nothing that would indicate that fighting debt with more debt would work in the future!

Did you see where Consumer Credit (read: debt) exploded higher in March to $29.7 billion!? That’s a 10% annualized pace for debt increases. OMG! And it wasn’t the usual suspects of car loans or student debt that was responsible for this HUGE increase. Try Credit Card Debt rising at a 14% pace or $11.1 billion! Household debt rose at 6.4% in the first QTR, which is three times the pace at which hourly earnings grew. And I ask you this – how can that be sustainable?

And it’s not just here in the U.S. that debt is growing. Worldwide debt is spiraling out of control folks. A recent McKinsey report showed global growth had increased by $57 trillion from 2007 to 2014. So, let me get this straight… 2007 and 2008, the financial meltdown occurred, and too much debt was deemed to be one of the problems, and how did the world go about correcting that?  They added $57 trillion in new debt to the already deemed “too much debt” total in 2007!  

Wait, What? So, does this all come crashing down tomorrow, or the next day, next week, next month? I don’t think so. I think this is going to continue growing at unsustainable levels until it no longer does. That’s when we will have our Minsky Moment. I know, I know, that sounds vague, but in reality that’s how these things work. It goes on until it no longer goes on.

One day, I’ll wake up, and get ready for work, I don’t check the news on the car radio on my drive into the office, because I don’t want to know anything yet. No distractions when driving! But when I get to the office and turn on the TV and screens and everything is chaos, and gold is soaring by hundreds of dollars a pop, and stock futures are sinking faster than a boat without a hull, and the news anchors are screaming, “Oh the humanity”. Then I’ll know that this accumulation of debt no longer goes on.

So. How’d you like that? You did? Well, if you like that, you’ll like this next passage too.

Today, we’ll get some “real economic” data, in Retail Sales. But there’s also “real life economic happenings”. That’s when something happens to you personally and the light goes on and you say, “I see now”. So, here goes…

Want some “real life economic happenings”? Let’s look at these because they are “real like economic happenings”.

First, close your eyes, and clear your mind. Now imagine if you will an Arizona desert, with a rail line/train tracks running through it. And on those train tracks you see not one, not two, but 292 Union Pacific Locomotives, just sitting there baking in the hot, hot sun. What would your thoughts quickly shift to? Well, mine shifted to the thought that apparently they aren’t being used. And if they aren’t being used, that means rail shipments aren’t being made. Well, I saw the picture of the 292 locomotives lined up on the train tracks in the Arizona desert. Saw it on Google Earth, so it’s visible from space!

So, that got me thinking. What about these rail shipments? Well Rail Freight tonnage was down 11% in April vs. a year ago.  Obviously, there must be another graveyard that contains the railroad cars that used to carry the freight somewhere, eh?

And it’s not just Rail Freight. Shipping freight is also looking for shipments. Maersk Line, the world’s biggest container operator, Hyundai Merchant Marine, and Hanjin Shipping Co. are all having major problems, with the last two in talks with their bankers to restructure their debts, and Maersk announcing layoffs and collapsing freight rates.

I couldn’t find anything on Plane shipments, but planes, trains and ships all seem to be in the same boat. No economic growth anywhere. The U.S. is supposed to be the economic engine of the world, and it’s failing miserably. The U.S. consumer, you know, you and me (and especially my wife HA!) is expected to save the economy. The problem is that because of the zero interest rates policy, consumers don’t have any money to spend, they spend it all on healthcare, insurance, food and shelter. And what they used to have as disposable income came from interest on their savings. Not any more.

And while I’m at it, I’ll step into the batter’s box and take a swing at the low interest rates. They are killing the economy. Yes, low interest rates are good for stocks, I get that, everybody does. But they aren’t good for nothing else! Think about savers. They used to be able to retire with their nest egg and live off the interest, vowing to not touch the principal unless it was absolutely necessary.  It’s not good for the Trusts and administrations in charge of Pensions. They used to be able to buy high yielding bonds to help them with their returns to make pension payments. And we now know how badly the Pension system is underfunded. And it’s not good for Insurance Companies. I’m wondering which one will be the first  to announce bankruptcy because they can’t buy bonds that give them yield any longer. And the list goes on and on folks.

The U.S. Data Cupboard today has the aforementioned Retail Sales for April today. In addition Consumer Sentiment for the first two weeks of May will print. And in the oil sector, there will be the Baker-Hughes rig count, which is has been trending down for months now.

I received an email yesterday from the World Gold Council (WGC) which I had signed up for, but had not received anything, until yesterday. The WGC waited until they had news of a strong first QTR in gold demand to report, I guess. Anyway, there were several news outlets to pick up this story. But I got my info directly from the WGC, which you can go to find if you like by clicking here, or here’s the snippet:

It was the culmination of five factors that helped the gold market see its strongest first quarter on record, according to the World Gold Council (WGC).

In its first quarter Gold Demand Trend Report, released Thursday, the WGC said that gold demand totaled 1,289 tonnes, an increase of 21% from the first quarter of 2015.

The biggest factor behind gold’s unprecedented performance from January to March was a resurgence of global investment demand, specifically in exchange-traded funds. The report highlighted that ETFs saw inflows of 363.7 tonnes, more than reversing the total outflows seen in 2014 and 2015.

Chuck again. This is the type of physical demand that we need to drive the short paper/price manipulators out of the metals markets. I got a kick out of something else I read on this, and that is an interview that Juan Carlos Artigas, director of investment research at the WGC had, where he was asked about this surge in demand, and he replied that he “wasn’t completely surprised”.  Well, no duh! You wouldn’t be surprised as long as you were aware of negative rates, zero interest rates, and no global growth!

And with that, I need to get off this bus today, and head to fantastico Friday corner. I hope I meet you there, and remember to be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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