Eurozone Inflation Remains Above 2%

Good day. I finally remembered to stay home and write on Monday mornings! YAHOO! I’ll show those mental giants that run our building who’s smarter! HA! It feels as if I’m going to be traveling or staying home today, writing from home, but as soon as I’m finished, I’ll head into work. Jen is back this week, and Chris is gone.

I hooked up the laptops and immediately pulled up the currencies, only to find that they look as though they are trading in the same clothes they wore on Friday! The euro (EUR) is still playing peekaboo with the 1.22 handle, and the Australian dollar (AUD) has found that trading above $1.02 suits it just fine! Gold continues to make 180-degree turns multiple times a day, and the games the manipulators are playing are really beginning to give me a rash!

Today, the markets will use U.S. retail sales for May, which will print front and center this morning. I can tell you that the Butler Household Index (BHI) indicates that the data will be disappointing. The question surrounding a disappointing retail sales is simply which way the traders will take the dollar when the disappointing data print this morning. In normal times, the dollar would get taken to the woodshed with disappointing data like retail sales. But as you all know, these are not “normal times.”

But after it prints, make sure you file it with all the other economic data prints that have been disappointing in the past couple of months — the Fed heads keep saying that they are ready to implement more stimulus, should the economy weaken. Quite frankly, I don’t know what they are waiting for. If I wanted to talk conspiracy, then I would say they are waiting for the elections, so that they are not seen as “political.” But who knows how weak the economy could be by then?

In the eurozone this morning, they will see the color of their final report on June consumer inflation. Look for it to be revised down slightly, to 2.3% from 2.4% in May. In case you’ve forgotten — and I don’t blame you, given the fact that the European Central Bank (ECB) seemed to have forgotten this long ago — but the ECB’s target ceiling for inflation is supposed to be 2%, but the fact that it has been above 2%, while interest rates have been cut twice now since Mario Draghi took the reins of the ECB, is troubling to someone like me, who believes that if you’re going to make a big deal about a ceiling or floor target, you had better adhere to it. But then that’s just me.

Shifting gears again, the Inconvenient Debt that I’ve talked about for over a decade now has had a life of its own. And looking back to a decade ago, when I began banging the drum about how badly our deficit spending was adding to the national debt, those numbers are chump change to what we rack up in the deficit spending these days!

But one thing that has always been a bugaboo for me is that, in my early days of bond trading, I was taught that the bond markets wouldn’t allow things like this to happen. There were “bond vigilantes,” and they would send the message to the U.S. government that the deficit spending needed to be curtailed, or yields would rise. The bond vigilantes have been AWOL, and I think I know why the government has them by the ear.

But then there was this story in the Bloomberg this morning about how Vanguard Group is sounding a warning bell to the government. Vanguard Group is the largest private owner of U.S. debt, at $148.2 billion worth, and they are saying that the government has until 2016 to contain its borrowings before bond investors revolt and drive up interest rates. “In the absence of a long-term credible plan, we are somewhere around four years away on where the markets are going to say, ‘Enough is enough,’” said Robert Auwaerter, who was inducted into the Fixed Income Analysts Society Inc.’s Hall of Fame this year.

I don’t know where he comes up with four years, but if you just look at Greece, they were going along just nicely with low yields and no problem financing their debt, until one day that they no longer had that ability. There was no warning; it just happened. Yields began to rise, and before you could shake a stick at the yields, they were soaring. So to me, saying four years is arbitrary at best. No one knows when the bubble will pop, but when it does, we’ll have yet another Minsky moment, and things are going to be very, very dark here in the U.S.

Big Ben Bernanke will speak tomorrow to the Senate Banking Committee, which is the semi-annual monetary policy testimony. This semi-annual trek to the “hill” by the Fed chairman was first introduced by the Humphrey-Hawkins Full Employment Act, which later expired, but the testimonies continue. I think the markets have just about given up getting all lathered up for a Fed head in hopes of an announcement of additional stimulus. So we’ll probably have some beating on Big Ben, but he’ll sit there and give the lawmakers that “I can’t believe you are questioning the great Oz” look.

I’ve got a special treat this morning for you. My good friend, and the Big Boss, Frank Trotter, is an excellent writer. He has always had an open invitation to send along notes to be added to the Pfennig. But he’s the busiest person I know and has very little time to get me stuff, but today is the exception. Here’s the Big Boss on his trip to the Las Vegas FreedomFest last week:

“Last week was a full schedule for me. I kicked off with a Monday night ascent and return of Mount Whitney with a group of financial service executives, all of whom are clients of Tiburon Strategic Advisors. Now before you say, ‘Boy, that sounds like an exciting group,’ as it turns out, there was little business and no monetary policy discussion at all — we all faked being normal! I caught about 11 hours of it on my GoPro and will have that scintillating footage up soon — hold on to your hats and get ready to listen for me gasp for breath! HA.

“Returning and recovering, I headed to FreedomFest, in that gigantic combination budget-cruise-ship-and-tractor-pull-crowd-selector known as Las Vegas, to speak to the assembled multitudes and hear what others were thinking. As expected in that crowd, there wasn’t a lot of variance from what you read in the Pfennig — slow going, trouble in Europe, U.S. fiscal and monetary policy unthinkably out of control, dollar rally now but decline in the intermediate to long term and no politician on the horizon willing to do anything about it. I got a decent laugh stating that I have used one slide now for 10 years straight because things haven’t changed since 2002 — a relative issue for the U.S. with fiscal policy, monetary policy, current account deficit and growth prospects in the near term. Talk about a superfecta!

“So what to do? You won’t be surprised that we discussed diversifying your cash holdings into currency and metals. We heard from many clients and others that they are concerned about how low rates and the slow economy impacts their portfolio. We talked a lot about EverBank Wealth Management and the global approach available there. I heard many more people than usual talk about ‘stopping the motor of the world,’ and met several who had. We’ll see how that plays out — t-minus 113 to the election!”

See what I mean? Chuck and Frank used to do presentations together, and then we divided and conquered. HA! But I would tell people that we had worked together so long that when we started working together, the Dead Sea wasn’t even sick yet! Yes, it’s been a long time, but all good times! Mostly.

Then There Was This… Chris may be gone on vacation to celebrate his 20th wedding anniversary, but he put down his glass of wine to send me this note. Here’s Chris with today’s Then There Was This:

“Reading through this month’s Bloomberg and spotted a story on stocks. The cover article is entitled ‘Stocks Billionaires Like,’ but of the six billionaires questioned on which stocks they like, two of them told investors not to purchase stocks. Mark Cuban suggests, ‘keep your money anywhere but the stock market,’ and Phil Ruffin says, ‘No stocks. Choose hard assets that have a cash flow and appreciate with inflation. They should cost triple to replace.’

“Just thought it was interesting that in an article that was supposed to be all about stock tips from billionaires, one-third of them said not to buy stocks!”

Chuck again. Diversification is the key, folks. Diversification — we all need to go the chalkboard and write it 100 times!

To recap, the currencies appear to be trading in the same clothes as they traded in on Friday, with the euro playing peekaboo with the 1.22 handle, and the A$ comfortable above $1.02. U.S. May retail sales is the Big Kahuna data print today, and Chuck thinks that it will be disappointing. Vanguard says the bond vigilantes will appear in four years. Chuck thinks it will be sooner than that!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning