China Says Plaza Accord Talk is "Fantasy"

And now… today’s Pfennig for your thoughts…

Good day, and a tub thumpin’ Thursday to you!

I have a lot of stuff to cover this morning, and I feel I’m going to go on a tangent about something that came up yesterday, so we’ll see where that takes us when we get there. But first things first…

The price action in gold yesterday – did you see it? I told you when I left you yesterday morning that gold was up $9 at that point. Well, it didn’t stop there, and by early afternoon it was up $28 on the day to $1,254. WOW! Unfortunately, that rise in the price of gold didn’t sit well with somebody (ies), could it have been the price manipulators? By the end of the day, gold was up only $3 on the day. I guess, I should be happy that the sellers threw us a bone.

The price of oil seemed to mirror gold yesterday, as most of the day the price of oil dropped and U.S. stocks followed. But then miraculously, the price of oil recovered by the end of the day, and so did U.S. stocks. I was writing a future piece for a Sunday Pfennig, and watched this whole pricing escapade take place. Was it the “invisible hand” that changed everything on the day? HA! As If!

I will say something that seems to me to be apparent now, and that is the pricing of gold & oil have diverged. You see, these two were viewed as the “anti-dollar” assets, along with the euro, and well, these days, there doesn’t seem to be any tie whatsoever between oil and gold. The “anti-dollar” avengers have been put down. Where’s the Hulk when you need him? HA!

This morning, the currencies seem to be wanting to flex their muscles vs. the dollar, as most of them, excluding Chinese renminbi, Russian rubles, Indian rupees and S. African rands, are booking gains vs. the dollar. Some gains are quite small, like the euro is up just 5 ticks, so you could say it’s flat on the day.

The Aussie dollar (A$) is down a bit, this morning, and this is interesting so stay with me here on this. Aussie CAPEX was firmer than expected in the fourth QTR, and one would think that would be a reason for the A$ to rally. I mean look at the numbers! The expectation was for a negative -3.0%, and instead posted a positive 0.8% gain. Ahhh, but here’s where things get interesting, you see, the 2016-17 expectations component of the report showed negative results. And the A$ got sold on “expectations”.

Well, in the book by Charles Dickens, Great Expectations, eventually good triumphs over evil.  At least that’s my memory of it, and so maybe, just maybe the actual future CAPEX spending will triumph over the expectations! (See how I tied that all together? Genius, simply genius I tell you, and if you don’t agree with me, then I’m taking my bat and ball and going home! HA!)

Pound sterling seems to have a bad case of the “BREXIT” Blues. I’ve got the BREXIT Blues, I woke up this morning and seemed to have a bad case of them BREXIT Blues. HA! But looky there, the pound is booking a gain today, so another case of a “dead cat bounce”? Looks like it to me.

Funny thing happened on the way to the Forum yesterday. While the currencies fought to loosen the dollar’s tight grip on them, the one currency that had carved out a small gain vs. the dollar, Japanese yen, began to lose ground. And the yen is down a bit this morning, not much but down nonetheless! Is this the new trading pattern for the currencies? If the euro is up vs. the dollar, yen is down, and vice versa? Sure seems like it, and that’s a divergence from the “safe-haven” trading the past couple of weeks. I always tell you that that currency traders are fickle, and they have the attention span of a gnat( I know, because I was once considered to be one! HA!).

And in China overnight, Chinese officials decided to come out and mention that the need for a Plaza Accord for the renminbi (remember we talked about this a couple of weeks ago?) is just “fantasy”. Ok… again, just like yesterday when Fed member Fischer, just out of the blue, decided to mention negative interest rates, why is China mentioning this now? Seems a little strange to me…

A dear reader sent me a note yesterday, that I just have to plug in here for this and some stuff I have for you in a minute. “When official denials are issued, you can then know whatever’s being discussed has in fact happened (or absolutely will)”  I totally agree with this quote. Totally! It’s akin to when you see an sports team owner come out and give the coach a “vote of confidence”, you can bet your bottom dollar that the coach is already on his way out!

So for those of you new to class, the Plaza Accord was an agreement made at the Plaza Hotel in New York City in 1985, by finance ministers from around the world that feared the U.S. dollar was getting too strong for the its fundamentals, which was a debt to Current Account ratio of 2.5%… That’s almost laughable that the finance ministers were concerned about a debt ratio that was only 2.5%. But at that time, building debt to influence an economy was in its young school boy years. So, a couple of weeks ago, the markets were all giddy about a report that came out calling for a Plaza Accord for the renminbi, but this time it would be to prop up the currency instead of weakening it like they did the dollar in 1985.

That same dear reader, above, sent me this yesterday. It’s a quote from George Orwell..

The further a society drifts from the truth, the more it will hate those who speak it.

I sure hope you dear readers will never come to hate me for speaking the truth!

And in that vein, I’ve been doing a lot of talking about NIRP lately, and yesterday, I dropped the time bomb on you that I thought NIRP and the end of cash were tied together. Now that you’ve had a day to think about that, I’m surprised that many of you didn’t immediately want to know more. Well, unfortunately, if I told you more, it would only be theory, considered conspiracy theory, and I’m not allowed to write that stuff in the pfennig any longer.

But, just yesterday, I was out on the public deck here, and had an audience of people that wanted to know what I did, and once they found out, they wanted to know what I thought about all this talk of ending cash. Well, those people got the conspiracy message. I don’t think any of them liked it either!

Did you see that the NY Times, of course the NY Times would do this! They ran an op-ed piece on why the U.S. should banish cash? I don’t make this stuff up folks…

So, since I’ve spent all this time on this subject, I just have to play with this some more, and give you a list of the Fed and ex-Fed members comments that have taken place recently regarding NIRP. You won’t believe how many there have been!

We’re taking a look at them. I wouldn’t take those off the table.

-Janet Yellen, Chairman, Federal Reserve, February 11, 2016

[Negative interest rates are] working more than I can say I expected.

-Stanley Fischer, Vice-Chairman, Federal Reserve

If the economy were to unexpectedly weaken dramatically, and we decided that we needed to use a full array of monetary policy tools to provide stimulus, it’s something that we would contemplate as a potential action.

-William Dudley, President, Federal Reserve Bank of New York

I think negative rates are something the Fed will and probably should consider if the situation arises.

-Ben Bernanke, former Chairman, Federal Reserve

Europe has demonstrated that negative rates are possible.

-Alan Blinder, former Vice-Chairman, Federal Reserve

Oh, the many webs we weave. Charlotte, Charlotte, please weave me a web. Many thanks to my friend, John Mauldin, for compiling that list, which can be found here.

The U.S. Data Cupboard wasn’t kind to the dollar yesterday. You may recall me telling you yesterday morning that the dollar held gains vs. all currencies except yen. Well, once the U.S. Data printed, the dollar lost its grip a bit. New Home Sales began 2016 with a drop of -9.2% in January vs. December. And then the Markit Services PMI printed and like I told you the other day, the ISM is still the preferred data on manufacturing and services, but the Markit data is good as an indication of what is to come in the ISM.

And the Markit Services Index dropped below 50 to 49.8, the lowest print for this data since 2013. The employment component of the data was way down, and the overall feeling toward the U.S. economy at this point is down. I’m down, I’m really down, I’m down, down on the ground, I’m down, I’m really down, how can you laugh when you know I’m down?

Today’s U.S. Data Cupboard finally gives us some real data, with the January Durable Goods and CAPEX Goods Orders will print, and finally there appears to be something good in these reports, after months of negative prints, both Durable Goods and CAPEX Goods Orders are expected to be positive prints. Now that’s something! But one positive print doesn’t make an economy, just like one swallow doesn’t make a summer.

I talked a lot about gold above today. But wanted to share with you that the shiny metal is back on the rally tracks this morning, attempting to put yesterday’s takedown in its rearview mirror, by climbing $7 higher this morning so far. I saw where CNBC Asia interviewed GATA Chairman, Bill Murphy. I have to commend CNBC Asia for doing this, because you would never see the GAT Chairman on CNBC here in the U.S. But in Asia where gold is viewed as a store of wealth, Bill Murphy’s story is widely accepted, whereas here in the U.S. it would be met with the same indignant comments that the hosts of the show had for me years ago, when I tried to show them the funny business in the aftermarkets trading. That were proven to be fact and not conspiracy a few weeks later! But I digress, and I apologize. I just think it was tres cool that CNBC Asia did this!

Well, U.S. Treasury Sec. Lew, might not think that there’s anything in the financial world to worry about, the IMF sees things differently. You can find the entire article on Reuters here, and here’s the Snippet.

The Group of 20 nations must plan now for a coordinated stimulus program to keep a slowing global economy from stalling, International Monetary Fund staff said in a report on Wednesday.

The report was prepared for senior G20 officials who are meeting in Shanghai later this week amid falling equity markets, volatile currencies and signs of economic weakness throughout the world.

“The G20 must plan now for coordinated demand support using available fiscal space to boost public investment,” IMF staff said in the report.

The Shanghai meeting is already being compared to the G20 meeting in April 2009 when officials agreed on coordinated stimulus to prevent a worldwide depression during the global financial crisis.

Chuck again. But, remember, Lew is basically saying, “Crisis, what crisis?” to all this.. .

Alrighty then, let’s get this out the door! I hope you have a tub thumpin’ Thursday, and don’t forget – be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

P.S. Be sure to sign up for The Daily Reckoning — a free and entertaining look at the world of finance and politics. The articles you find here on our website are only a snippet of what you receive in The Daily Reckoning email edition. Click here now to sign up for FREE to see what you’re missing.

The Daily Reckoning