Closing In On The Rate Decision

Today’s Penning for your thoughts…

Good day, and a Tom terrific Tuesday to you!

Well, we’re one day closer to the Fed announcement at 1 pm CTon Thursday. The markets and the people on the cable TV news stations are like little kids who are waiting for Santa Claus to arrive. Hey! Even IF the Fed decides to hike rates a small bit on Thursday, you’ll have to pay attention to their comments afterward, which most likely would go something like, “We want to be clear to the markets that this does not open up Pandora’s Box of rate hikes, and that we will be taking our good sweet time coming back to the rate hike table. Is that clear? Yes. How clear? Crystal!”

I laugh at myself here, because when on earth would the Fed talk like Chuck? But if I were a Fed member I would certainly attempt to bring some levity to their talks. They’re always quite dry, and need I say, boring?

The markets aren’t willing to accept the thought that the Fed is going to hike rates, and neither should they! I mean, what would that tell you IF they did change horses in the middle of the stream? That they are not on terra firma with their thoughts, that’s what! Changing horses in the middle of the stream, gets you wet, and sometimes cold.- The late great, Dan Fogelberg.

So, with the markets on board with Chuck on the ship of no rate hikes, the dollar doesn’t get love and the currencies are free to roam about the yard. But like I said yesterday, Commodity Traders are not on board this ship of no rate hikes, and for that indiscretion, gold and the other precious metals can’t find a bid, and neither can the commodities like copper, other raw materials. The one commodity that seems to be holding its own these last few days is oil. The price of oil has held steady Eddie at $44 and change.

But so too has  the 10-year Treasury yield held steady Eddie. The 10-year is 2.17%, and the bond guys are left scratching their collective heads. They act like they want to take yields higher, but then chicken out and go back to their old habits.

I read something the other day that was interesting. The writer pointed out that a lot, and he means a lot of traders and analysts on Wall Street, were still in college the last time interest rates were hiked in this country (2006). 2006, was a good year for me, as this was the year that: 1. I was interviewed for the upcoming book by Craig Karmin titled: Biography of the Dollar, 2. My beloved Cardinals won their 10th World Series, 3. And it was the last year that I’ve had without some sort of chemo.

But for the youngsters in the biz, they haven’t seen the markets react to a rate hike. And I still don’t think they will this month! But there are those that believe the rate hike is coming on Thursday. I promise this is the last piece I’ll talk about with the Fed decision today.

Well, I was reading friend, John Mauldin, and his weekly letter yesterday, and in it he talks about how he believes the Fed does need to hike rates, for, when the next downturn comes along, they’ll have some bullets in the chamber to use. Otherwise, it’s another round of QE or negative rates, which we don’t want either of those.

Interesting thought process. But I don’t agree. And don’t think that raising rates just so you have some bullets in the chamber for the next downturn is a reason to hike rates.  I understand that John thinks the economy is doing well, and the recovery is getting long in the tooth. But I’m of the opinion that the recovery was one that wasn’t, and we’re still in deep dookie

On a sidebar, I haven’t seen John in a couple of years now. I used to see him in Vancouver each year, but this year I didn’t go to Vancouver, and if things don’t change for me, I doubt I’ll ever go there again, which is too bad, because I absolutely adore Vancouver!  John is always traveling to the edges of the globe and back and then all around the horn again. I don’t know how he does it, I really don’t enjoy getting on planes, do you?

The euro remained above 1.13 yesterday, albeit lower in the handle, as the single unit gave back some early morning gains as the day went on. Probably profit taking. Imagine, if you will, the investors, traders, etc. that took a flyer on the euro when it fell to 1.05 earlier this year. Of course they are smiling like the Cheshire Cat, and on the other side are investors who’ve held euros through thick and thin, their smile is upside down.

This morning the German Current situations index as measured by the think tank ZEW, surprised the markets with an uptick to 67.5 from the 65.7 last month, and expectations had the index falling to 64.  This data doesn’t get much press, and so I think the markets just saw the data and moved along giving it the old, “move along for these are not the droids we’re looking for”.

Well looky there!  In a release of the Annual Financial Report, Canada indicated that they achieved a return to Surplus Status one year ahead of their plan to do so.  How about that? And that’s with the price of oil, and other raw materials that are the lifeblood of economics in Canada going into the dumpster this past year.

Canada said that their actual Surplus number was (in dollar terms) $1.9 billion, for Fiscal Year ending March 2015, vs. the projected shortfall of $2 billion.  You know, it was just two weeks ago, that everyone feared the sky was falling, and now two weeks later, the reports are quite different, and this holds true in Canada as well.

The Canadian dollar/loonie is stronger this morning after this announcement printed yesterday afternoon.

The Aussie dollar (A$) has moved over the 71-cent handle as its recovery continues. Overnight, a new Prime Minister was named in Australia. I talk with and trade emails with quite a few Aussies and it’s pretty clear to me that they didn’t particularly like the outgoing PM, Abbott, so now they have a new PM to dislike! HA!

I think that this announcement has helped the A$, but the main mover for the currency yesterday and overnight has been the September Minutes of the Reserve Bank of Australia (RBA), which to me definitely had a dovish flavor to them, as the RBA acknowledged the global problems have definitely increased the downside risks to the Aussie economy outlook. And that pretty much puts additional rate cuts on the back burner for now, and that’s a good thing for the A$…

The best performer overnight though has been the Japanese yen, which dropped a full figure to 119.50, as the Bank of Japan (BOJ) had no new developments or announcements of additional QE, which were rumored to be a part of this meeting.  But this is just window dressing, curb appeal, lipstick on a pig folks. Japan is a basket case, and nothing changes that, and a basket case country deserves a weak currency, which yen is, has been , and will remain to be!

The Chinese renminbi appreciated by a much larger amount than the Goldilocks “just right” amount the day before. No news from China overnight, so I guess those responsible for moving the renminbi stronger are also on Chuck’s ship of no rate hikes.  Where the flag that flies over the vessel has the no rate hike for me colors pinned to it.

Well, today is a quite the day of show for the Data Cupboard, with August Retail Sales, and then two of Chuck’s faves, Industrial Production and Capacity Utilization. We’ll also see the color of the latest Empire Manufacturing Index (NY region), which you may recall the previous month fell out of bed and caused some slippage in the dollar.

In addition, there’s August Manufacturing Production, and Business Inventories. So, quite a bit to chew on before swallowing this morning, folks. I already told you yesterday what the BHI had to say about Retail Sales, and as far as Industrial Production is concerned, I would look for another negative print, as most of the airplane stuff was in the previous month’s print.

Well, gold is down $4 this morning, but remains above $1,100, by the skin of its teeth. I was reading Ed Steer’s letter yesterday from Saturday, and in it he reflected on an article that appeared on Reuters regarding gold coin Sales surging in the 3rd QTR in both the U.S. and Europe. So, let’s listen in to what the article had to say:

Gold coin sales in the U.S. and Europe have surged in the 3rd QTR, with sales from the U.S. Mint reaching levels not seen since the price crash of 2013, as a low price and a series of market shocks fuel retail buying.  Sales of gold American Eagles have nearly tripled year on year in the 3rd QTR with most of September still to go, reaching 322,000 ounces. That’s the highest of any quarter since the gold crash of 2013.

And as always, Chuck will ask the same question.  All that physical demand, and yet the price of gold remains in check.

How can that be?  Hmmm… I know the answer, but I would rather not talk about it, my blood pressure is just now coming down from the high levels it reached last week in Houston.

I have another treat for you today, dear reader. Jim Powell, of whom I’ve quoted on more than just a few occasions in the Pfennig and the Review & Focus (our client only letter), is the author of a great newsletter that I subscribe to called: Global Changes & Opportunities Report (GCOR).

Jim and I worked together on a white paper about 12 years ago. But, for now, he wrote in his latest letter something that sounds very familiar with what I’ve been saying for a year now.  Let’s listen in to the great Jim Powell.

If the economy appears to be moving towards a serious downturn, the Fed will try to stop it with another QE (Quantitative Easing) program.  Naysayers argue that the Fed won’t be able to do as much to fight a new plunge as it did during the Great Recession because it doesn’t have as many resources. But being out of money never stopped anyone in Washington. The Fed will print more dollars that it doesn’t have, it will run the national debt even higher, and it will do its amazing buy-and-sell shuffle with bonds.

Unfortunately, another QE intervention will lead to an inflation rate that is even higher than we have been expecting. That’s why (drum roll please) You must continue to have both inflation and deflation investments in your portfolio.

Chuck again. Yes, I must point out that in this most recent GCOR, it wasn’t the first time that Jim had mentioned another round of QE.  I just love the way Jim writes. He started this month’s letter with this line that just had me laughing out loud. “back in the late Jurassic I was a Boy Scout in Minnesota.”    Great stuff Jim!

That’s it for today. With that, I’ll hit send, but not without telling you to have a Tom terrific Tuesday!

Regards,

Chuck Butler
for The Daily Reckoning

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