BREXIT Fears Overtake the Markets

And now… today’s Pfennig for your thoughts…

Good day… And a Tom terrific Tuesday to you!

Well, we’re waiting for some very BIG NEWS this morning from the Morgan Stanley Capital Index, which is also known simply as MSCI. The MSCI is going to announce tomorrow whether or not they will add Chinese stocks to their MSCI Index. More on that after we get through the introductions!

Well, it’s one of those old days that we used to call “risk off” days, where the dollar holds the conn against just about everything out there, with one exception; Japanese yen. The one currency, that fundamentally, should be getting sold down the river, instead is the one currency that has a gain vs. the dollar this morning.

What on earth would cause dollar traders to be taking all sellers and marking up the dollar this morning? It can all be said with one made up word – BREXIT. The “leave the EU vote” is really gaining momentum at this point, and with only nine days left until the referendum (6/23), things are looking like this could go all bad for pound sterling, and for that matter, the “risk assets” because IF the leave vote wins, a flight to safety will be the knee-jerk reaction, and with every poll showing the leave vote in front, the more fear is put into the market.

That would mean the fear assets, like gold, silver, and U.S. Treasuries would be bid higher, and they were yesterday, as gold gained $10.50 on the day, while the 10-year U.S. Treasury’s yield fell below 1.60%. That’s right, 10-year yields are below 1.60%. But wait! That’s not all! The yield on the German 10-year Bund fell below zero overnight. So, now we can add German Bunds to the list of government bonds that have yields below zero.

It’s all craziness folks, and I suggest we sit this out, and watch it all unfold… I’m just freaked out by all these negative yields around the world, it’s not going to end with everyone happy either!

So, the dollar has the conn today, ahead of the start of the FOMC (Fed) Meeting that will culminate with a rate decision tomorrow afternoon. I don’t know of anyone in the markets that still believe that the Fed will hike this month, and that’s a scary thing, don’t you agree? Think about it… The Fed could really throw a spanner in the works by surprising the markets with a rate hike! But I don’t believe they will, for this could really unravel things with a force that we haven’t seen in a while…

Gold gained $10.50 yesterday, but is giving back $3 of that gain in the early morning trading today. I don’t know who would be selling gold right now given the “fear in the markets” that resides right now, but someone is, and hopefully they are doing so with a huge gain! But is that what buying gold is all about? Buy it, and when it goes up, sell it? Well, to traders that might be the case, but to real investors, the thing here is to buy Gold, put it in your investment portfolio and forget about it. Like those old commercials: Set it… And forget it!

I have silver that I bought for my, then, two kids in the 80’s… Never sold it, and don’t intend to, unless push comes to shove in the world, and paper currencies are no longer accepted. But then that’s Armageddon stuff, and I get in trouble when I write about that happening. So, let’s just keep it at that, and everyone will be happy.

OK, back to the MSCI… Years ago, when the dollar was still the king of the castle, (2001) I wrote in the Pfennig about how the MSCI was looking to add pound sterling to its mix of currencies, and that this move could be HUGE for pound sterling. Our Investment guru for the bank at that time, Chris Lissner, told me to cool it on that kind of talk, as what would happen if the MSCI didn’t add pound sterling. Hmmm, I thought… And then said, but what if they do? And we agreed to disagree…

So fast forward to today, and the announcement that the markets are waiting for that’s due tomorrow morning Hong Kong Time, from the MSCI, on whether or not they will add Chinese stocks to their mix. Talk about HUGE potential boost for the worst performing stock market of the last 12 months… The Shanghai Composite index has fallen 45% in the past 12 months!

The MSCI was started in 1968, so it’s not new, and has been around for a long time, and is used as the base for exchange traded funds (ETF’s). That means the ETF duplicates the index’s stock holdings. So, there is a lot of fuss around this announcement tomorrow morning, which will come in the middle of the night for us here in the U.S. So, tomorrow morning when you wake up, the announcement will have been made, and everyone will be getting ready for the FOMC announcement later in the day.

The Chinese didn’t see this upcoming announcement as any reason they should stop their nightly depreciations of the renminbi, and marked the renminbi down in the overnight fixing. But then why would they go against the grain when all the other currencies, except yen, are losing ground vs. the dollar? And what makes the yen’s stronger move overnight even more impressive or questionable, I can’t decide right now, is that the ratings agency, Fitch, downgraded Japan’s Credit Rating to Negative, but the markets just shrugged that news of like water off a duck’s back!

Are they crazy, these yen buyers? Well, if it’s only for short-term gratification, then I guess not, because no amount of ratings downgrades are going to stop the short-term traders from front running the Bank of Japan (BOJ) and their long awaited new stimulus. I just shake my head in disgust with this buying, and the reason, and the short-term trading to begin with!

The U.S. Data Cupboard finally has something for us today. May Retail Sales will print, and like I told you yesterday, the BHI indicates that it will be positive, but barely, and certainly nothing like the April blowout number of 1.3% (I wonder if that will be revised downward?). Not much else is there today, third tier data at best.

If we did get another blowout number for Retail Sales in May, the Fed members would be questioning Janet Yellen about her pending decision to keep rates unchanged, tomorrow. But I don’t think we’ll see another blowout, so the Fed members can get back to their board games… Oh, no! I have to go directly to jail, and not pass Go, or collect $200!

I wanted to share with you something that my friend, David Gonigam, over at the 5 Minute Forecast (the 5) had in his email letter yesterday. It’s James Rickards going over the three things that Central Banks could still do to achieve their goal of inflating their economies. They’ve tried zero rates, bond buying, and now negative rates, and nothing has worked… But Rickards thinks these three would work, and believes we could see Central Banks heading in these directions soon.

So this will be the FWIW section today, as I get this from the site, where if you subscribe to one of the excellent newsletters they offer, you can then get the 5 each day. I’ve told you this before, I don’t miss a day of the 5!

So, here goes! The first item is “helicopter money”:

‘Helicopter money results when governments run larger deficits and central banks print the money to cover the deficits,’ Jim explains. ‘Central banks have been printing money since 2008. The problem is banks won’t lend it and people won’t spend it.’

‘Helicopter money cuts out the middleman. Governments just borrow and spend the money directly without waiting for the banking system to do the job. Central banks pick up the tab.’

The second item is Special Drawing Rights or SDR’s…

‘The one advantage of SDRs is that very few people understand them,’ says Jim, ‘and there’s no political accountability. SDRs can work hand in hand with helicopter money.

‘If governments want to spend more but legislatures won’t let them, the IMF can hand out SDRs, and governments can spend those without waiting for their own legislatures to act. The IMF acts like the ‘central bank of the world,’ and no one can stop them.’

And the 3rd item is Simply raise the price of Gold…

‘A higher dollar price for gold is practically the definition of inflation,’ Jim tells us. ‘Governments can do this in a heartbeat. The Fed would just declare the price of gold to be, say, $5,000 an ounce and make the price stick using the gold in Fort Knox and their printing press to maintain a two-way market.’

‘The Fed could sell gold when it hits $5,050 an ounce and buy gold when it hits $4,950 an ounce. That’s a 1% band around the target price of $5,000 an ounce. The band and the use of physical gold will make the target price stick.

‘A higher price for gold is the same as a lower value for the dollar. The world of $5,000-per-ounce gold also means $10 per gallon gas at the pump and $40 for a movie ticket.’

Boom — there’s your inflation.

Chuck again… I thank David Gonigam again for getting this to me, and now to you dear reader! I have to tell you I see the SDR’s thing being at the top of the list for Central Banks… but If it were my list, I would have the raising the price of gold as number one! But think about that, folks. If inflation warrants $5,000 gold price, then everything around us would be much higher priced. And would mean if you want protection against that kind of inflation the only answer is to own physical gold (and silver of course!).

That’s it for today. With that, I get this out the door, and hope you have a Tom terrific Tuesday. Be good to yourself!


Chuck Butler
for The Daily Pfennig

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