China Surprises The World!

Today’s Pfennigfor your thoughts…

Good day, and a Wonderful Wednesday to you!

Well, Front and Center this morning, we have news from China that has brought smiles to most of the global growth campers.

China printed their 2nd QTR GDP report last night, and China’s economic growth remained at 7%, which was stronger than the estimates of economists that had pegged China’s 2nd QTR GDP at 6.8%…

So, not only did China’s economy prove to be resilient, and probably, a benefactor of the stimulus that the Chinese government has injected into the economy, but it beat the estimates, and that, to me, is a good show!

I still believe that China’s economy will not collapse, as most economists and analysts believe, and that China will actually see a gradual recovery in the second half of this year, so put that in your pipe and smoke it, economists and analysts!

Oh, and the renminbi was allowed to appreciate a bit last night, so we have that going for us today!

The other BIG news today is that Fed Chair, Janet Yellen, will make the trek to Capitol Hill and give her semi-annual testimony on the economic outlook.

This used to be called the Humphrey-Hawkins Testimony, but that bill that required the Fed Chair to do this twice a year, expired long ago, but the treks to the Hill are still made by the Fed Chair. I wonder if she had to make an edit or two after seeing the rotten Retail Sales for June that printed yesterday?

I doubt it. You see, she’s on a mission, like Jake and Elwood, to keep the markets on the edge of their collective seats, and will most likely come out with more of the same hogwash (in my opinion) that the U.S. economy is going to be very strong in the 2nd half of this year, the slowdown through now, was just “transitory”, and she expects to raise rates 2 times this year.

That will sink the stock market’s battle ship, but push up the dollar strength.

But it’s all smoke and mirrors folks. I’ve said this before so forgive me if I begin to sound like a broken record, but I still don’t see it.

I don’t see how the Fed can raise rates in this economic environment, as far as final sales are concerned, which to me is a much better gauge as to how the economy is performing vs. GDP, which as we just saw last year, gets “adjusted” when things do go as those that make the rules, want them to go. And Final Sales since 2007 have averaged 1% growth.

But, the Fed has to “save face” with the markets eventually, right?  Yes, I do believe that will happen. So, while I say I can’t see the Fed hiking rates in 2015, I will admit that a small 10 or 15 basis points hike just so the Fed can save face with the markets is a strong probability.

But not two 25 basis points hikes that total 50 BPS or ½%…   Just doesn’t seem as though there’s anything there to back that up, other than words.

The Bank of Canada (BOC) meets today, and here’s where the rubber might meet the road, folks. I’m feeling as though, that the BOC Gov. is in the mood to weaken the Canadian dollar/loonie even more than it has weakened already, and he could do that very easily with a rate cut, that would bring the internal rates in Canada to ½%…  UGH!

But then I warned you all two years ago when Stephen Poloz took the reins of the BOC Governorship from Mark Carney, who left to become the Gov. of the Bank of England, that Poloz came from the Trade side of the government, and my spider sense immediately went crazy, and I pointed out that the trade side guys are always whining and crying about needing a weaker currency.

So, who do you think Poloz “sides with” on these calls? I know. UGH!

There’s an important piece of the Greek Debt Aid that needs to be resolved today, by 1pm CT, and that is the four pieces of legislation submitted to parliament (Greece) must be passed today.

Oh, and did you see that the IMF had something to say about the Agreement? I would think they would be happy as they will get repaid their loans to Greece. But they had to make a comment anyway.

The IMF criticized the agreement saying the obvious, but saying it nonetheless, that Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.

Well, you knew that someone other than me was going to point this all out, right?

Yes, Greece now owes the Eurozone more than 300 billion euros, that, they will never be able to repay. That’s just my opinion and I could be wrong, but all this agreement has done, is keep Greece in the euro, and kicked the debt can down the road.

This was the 3rd “bailout” that Greece has received since 2010. So, in about 3 years, we’ll revisit this horror show of debt. But by then, who knows what will have happened to the financial system of the world? Maybe it will have its own problems as it deals with the weight of all the debt in the world, and then maybe not.

I think being aware of all this debt that remains and can never be repaid (in my opinion), is the reason the euro is stuck around 1.10, and can’t find legs to run in either direction.

One would have thought that a deal with Greece would allow the euro to break the leg braces is has worn during this whole debacle and start to run like Forest Gump. Run Forest, Run! But unfortunately for the euro, it just took on more debt.

And Greece’s debt is the euro’s debt, folks. And I’ve blasted the U.S. debt picture for years, and now I can’t sit idly by and watch the Eurozone do this and not blast them!

The U.S. data cupboard has plenty of data on the docket today, starting with June PPI (wholesale inflation), which lately has become a joke just like it’s kissing cousin, CPI (consumer inflation). But other than PPI, we’ll get two of my fave reports — Industrial Production and Capacity Utilization — for June.

I don’t look for either of those two to highlight a strong economy. In fact, I wouldn’t be surprised to see them disappoint the expectations.

The Fed’s Beige Book will print this afternoon, but trust me on this one, the markets’ focus is going to be on Yellen’s testimony, where she will most likely talk about an improving economy and the need to hike rates. And the Beige Book will be a forgotten thing.

Yesterday’s data cupboard had the awful print of Retail Sales, so let’s go to the tape to review that.

The BHI was back to being old reliable yesterday. I told you yesterday that the BHI indicated to me that June Retail Sales would be disappointing. I forgot to tell you that they were already expected to be lower than May’s 1.2% gain that was revised downward to 1%… June Retail Sales fell a negative -0.3%…  That’s right I said “negative.”

Since “consumption” is such an important part of GDP, this news from June has to be cold water thrown at the economists that were singing high praises of the economy last month.

And while we’re talking about numbers… I saw some very ugly and scary numbers on Ed Steer’s letter this morning that he took from

Get this: the U.S. is facing a $1 trillion pension shortfall!  States are short $968 billion for their pension systems, with Illinois, Kentucky, and Connecticut having less than half of their pension programs funded.

Illinois is in the hole by more than $100 billion! Then add to the $968 billion shortfall from the states, the debts from local programs, and you get to $1 trillion!  OUCH!

Who’s going to pay for that?  Or, will the people that thought their retirement futures were golden, have to take cuts, like they are going to have to do in Greece?

And shifting gears here today… FAO Schwartz is closing their doors today, along with the grocery chain A&P. And the economy is strong?

The price of gold is flat this morning, and pretty much ended up flat yesterday too. I have to say that while the cheaper price of gold has allowed many individual investors and Central Banks to add to their hordes of gold, I’m really growing tired of it.

And the folks over at Bank of America Merrill Lynch (BAML) released a fund manager survey yesterday that said that for the first time since August 2009, they view gold as undervalued.

Gold is nearly 40% below its high back in 2011. That just rattles my chain, folks. But, maybe, just maybe, because you never know, the fund managers will be proven to be correct!

That’s it for today, and I hope that you have a Wonderful Wednesday!


Chuck Butler
for The Daily Reckoning

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