Damage Control Administered

And now… today’s Pfennig for your thoughts…

Good day, and a marvelous Monday to you!

Well, did you see the damage control team out in force on Friday? You know, the damage control team that was sent out to fix what Fed St. Louis President, James Bullard had said about rate hikes last week. Well, the damage control was swift, as Cleveland Fed President Loretta Mester Friday morning presented positive comments on the domestic outlook, stating that “the economy can work through this ‘rough patch’ and gradual hikes this year are still expected.”

And then, as if right on cue, the stupid CPI showed a move higher that hasn’t been seen since June 2012. Hey! Did anyone stop to think that maybe this was just a blip, a temporary move higher, for this data has not shown one inkling of indication that higher moves were coming. So, to me, it was like the “creators” of CPI were aware that the Fed needed for the country to see that inflation was rising, and voila! There you go! No more questions asked, you want it, you got it, bust a move!

The Mester comments to water down the Bullard comments, and the rise in CPI (consumer inflation) sent gold on a trip to the slippery slope, and the $22 gain it booked on the Bullard comments, has been reversed on the Mester comments. The dollar is much stronger this morning, as the rise in CPI has traders believing that an interest rate hike is back on the table for March.

And gold has taken silver, platinum and palladium along with it for its ride on the slippery slope this morning. At this point I have to wonder if gold traders will realize they’ve gone too far with the selling, or if the price manipulators see this as an opportunity to “pile on”. Remember when “piling on” was a penalty in football? Now a days it’s called “unnecessary roughness”, and I would love to throw a penalty flag on the price manipulators and penalize them for their “unnecessary roughness”.  And when they had done it so many times, I would kick them out of the game!

The dollar is much stronger, as I said above, this morning, but not against every currency. There is a handful of currencies booking gains vs. the dollar this morning, so let’s run through those because that list is much shorter than the list of currencies with losses vs. the dollar this morning!  In fact, the Russian ruble is the best performer overnight. In addition to the ruble, the Chinese renminbi was allowed to appreciate at the fixing last night, the S. African rand has a nice gain overnight, the Mexican peso is also looking very perky this morning, the Aussie dollar (A$) and New Zealand dollar/kiwi add some flavor to this list, and to complete the list is the Singapore dollar.

The British pound sterling is getting whacked today, after the European Union Summit, ended with U.K. PM, Cameron, agreeing to changes in the EU bylaws and therefore backing out of the BREXIT challenge, for now. Like I’ve said before, the final word on the BREXIT will come in a public referendum in June, but for now, Traders just don’t like the fact that Britain decided to back down from its claim that it was going to leave the European Union.

Of course if you ask me, I would say this is all grease covering the real problems in the U.K. Debt deflation, just like they have in Japan, and the U.S. will soon find out about it. Too much debt, and the deflation of holding too much debt. Think about that for a minute folks.

OK, did you think about that? Well, it’s ok if you didn’t! For I’m going to give you my two-cents plain whether you’re ready or not! When countries like Japan and the U.K., the U.S. and now even the Eurozone, (I know it’s not a country, but let’s pretend that they are!)  build up so much debt, they have to issue so many bonds to finance that debt, right? And if they allow interest rates to rise too high, they increase the cost of financing the debt. So, these countries need to keep interest rates so low, and then that manifests more low interest rates and voila! You have debt deflation!

Sure, we have inflation in the U.S. I actually saw a report on Friday morning (and not the stupid CPI!) called the Chapwood Index (www.chapwoodindex.com) which reflects the true cost-of-living increase in America. It’s updated twice a year and reports the unadjusted actual cost and price fluctuation of the top 500 items which Americans spend their after-tax dollars in the 50 largest cities in the U.S.

So, you can check that out if you wish to do so. But the thing is that the Fed is really only concerned with wage inflation. And until recently, there had been zero, zilch, nada, nil, nothing, in the form of wage inflation here in the U.S. And I think that recent blip higher was a temporary thing!

Well, the price of oil has remained stable, and I would think that’s why the ruble, and peso are having such strong showings this morning. The Canadian dollar /loonie is flat on the day, as it struggles with its new leader and his direction of deficit spending, and the Brazilian real hasn’t opened for trading yet this morning, but unless there has been some internal disaster in Brazil overnight, I would think that the real would open with gains, based on the stable oil price.

I harken back to Currency of the Month, when we highlighted the Canadian dollar/loonie and pointed out that the new leader, PM Trudeau, had plans to spend, spend, spend, and run the deficit higher and higher in an effort to stimulate the economy. I had pointed out that Trudeau’s finance Minister was someone that had worked on balancing the budget in a previous administration, and that maybe, just maybe he would fight Trudeau’s potential deficit spending.

Well, it appears from what I read regarding Canada, that Trudeau is winning the argument so far, and that’s going to weigh heavily on the loonie going forward, unless someone gets ahold of Trudeau and makes him think about what he’s doing!

Well, the equity indexes around the world are up and the futures here in the U.S. indicate a stronger opening for stocks this morning. One has to wonder about the mental abilities of these traders at this point, but then that’s just me thinking aloud.  The thing I was going to mention is that with the equity indexes up, oil stabilized, China back on board with appreciations of the renminbi, and a Fed member offsetting the Bullard comments, the risk markets are higher this morning, and that means the Aussie dollar (A$) and New Zealand dollar/kiwi get to participate in the “rally vs. the dollar club” today.

Oh, those Central Bankers, you’ve just got to love them, eh? NOT! The Fed members have gone beyond their call of duty, to stabilize the risk markets (read stocks), after the drops in stocks got to be quite large. I don’t recall that the Fed was ever asked to support stocks. But maybe in the smoke-filled, back rooms where deals get agreed upon, this was done. I just shake my head in disgust. And so does famous investor and author, Jimmy Rogers, who in an interview with CNN, just ripped all Central Bankers apart. He says some things that I would get in trouble for repeating here, but you probably want to hear what he has to say, so you can check out his interview here.

And for a calmer head to explain, once again, I turn to the great writer and analyst, Grant Williams, who you can read every two weeks too, but you would have to subscribe. To me every penny paid is worth its weight in gold, but then I love reading his stuff. I’m just going to give you his closing remarks from his last letter, but they say a lot. I sure hope he doesn’t mind:

The weakness in global markets is less to do with China, or oil, or the perilous state of the global economy than it is to do with a long-overdue loss of faith in central banks and that is much harder to fix with more of the same policy.

The answer (for now, at least) is that which central banks are trying to remove as an option-cash… and gold…and a sprinkling of volatility. Time has been called, but the bar will open again. You just need to make sure you have what you need to buy yourself a drink when it does.

Alrighty then. One more thing to get to before we begin to go down the road to the Big Finish.  The Flash PMI’s from the Eurozone (manufacturing indexes) showed a larger than expected drop in the index numbers, and thus halted the gains we had seen in the Eurozone economy recently. And the euro is getting whacked this morning because of this weakness in the flash PMI’s. It’s not been a good couple of weeks for the euro.

Funny how that happened, eh? A couple of weeks ago, you might have thought that the euro was leaving the woods, and then somehow it got turned around and is right smack dab in the middle of the woods again.

Well, I talked above about gold getting whacked this morning. The shiny metal is now down nearly $24 on the day. The same goes for gold and we just talked about with the euro. Gold appeared to have left the woods in good shape last week, only to find itself right back wondering about the woods this morning. I’ll just keep saying this and maybe everyone will catch on. That somehow it got turned around. Funny, not funny ha-ha, but funny how these things happen, eh? Wink, wink.

I did read this past weekend that according to Bloomberg, gold holdings have reached the highest level since 2010. And yet the metal sees a $24 loss hung on it this morning?

The U.S. Data Cupboard doesn’t really have much for us today. The Chicago manufacturing index for January and the Markit PMI for Feb (preliminary). And Friday’s Data Cupboard just has the stupid CPI report, so we’re really lacking for some real data folks.  It won’t be a week of lacking real data though, as we’ll get to see Durable Goods Orders, Capital Goods Orders, Personal Income and Spending, and some other prints later this week. So, hold onto your caps today, and let the wind of risk markets blow. I’m going to sit this one out.

I pulled this from my daily email from MarketWatch, and then on Saturday, I saw that Ed Steer had pulled it for his letter too! That has happened on more than a few occasions in the past couple of years!  Anyway, here’s the link for the article, and here’s your snippet:

Less than two months into 2016, and corporate defaults are on the rise.

Three U.S.-based oil and gas companies defaulted this week, lifting the global tally for 2016 to 19, according to Standard & Poor’s.

Not surprising given the pressure on oil prices, the energy sector continues to account for the bulk of the defaults at six, followed by metals and mining at four, said Diane Vazza, head of global fixed income research. ‘Volatile oil and commodity prices have led to higher levels of both downgrades and defaults in these sectors since late 2014,’ Vazza said.

Chuck again. I warned you all about these problems with the oil producers a year ago, when the price of oil was dropping every day. And now the chickens are coming home to roost on this problem.

That’s it for today. I hope you have a marvelous Monday! And… be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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