Fear is Back in the Markets

And now… today’s Pfennig for your thoughts…

Good day, and a wonderful Wednesday to you!

That bump higher in the price of oil didn’t last long, and there’s not much in the way of data today, so I’ll just winging it! HA! As if I didn’t do that every day! HA!

Fear is back in the markets this morning folks. Yesterday, we had a feeling of things would be ok. And today, fear has gripped the markets around the world. As I just mentioned above the price of oil dropped, but did remain above $30 so far. The Chinese weakened the renminbi in the fixing, for the fourth consecutive day, and the Fed members out on the speaking circuit gave conflicting opinions as to what’s going to happen with interest rates in March.

There’s not much else that could have caused fear to be spread this morning, but as touchy as the markets have been, it doesn’t take much. Gold is up $9, and the currencies are down, with only the Japanese yen sitting with a gain vs. the dollar this morning, and that yen gain is quite small!

So, the risk is out of the markets, and that means the Antipodean currencies have lost their mojo today. One day, traders are feeling that the countries like Australia and New Zealand will be able to maintain their positive interest rate differential to the U.S., and the next day that thought is thrown out the window! UGH!

The Fed members were obviously not singing from the same song sheet yesterday, and that’s something that just drives me cuckoo for coco puffs! Sure each individual has their own opinions, but when you’re with a group like the Fed, you need to toe the company line. And this is where leadership is sometimes lacking in an organization. The leader should tell the members of the organization what the goal of the organization is, this is how we’re going to go about distributing the message that helps us achieve that goal, personal opinions are to be left at the door.

Well, that’s how I would run things if I were King. So, since I just spent an inordinate amount of time talking about the Fed members refusing to sing from the same song sheet, I guess I should tell you what each of the said.  First up was Fed member Fischer, who said that, “it’s far too early to judge the impact of market volatility on the U.S. economy.” He then went on to explain that earlier periods of market volatility had little impact on the U.S. economy, which led the markets to believe that he was suggesting that he’s torn between two lovers (rate hike or no rate hike). So, no real direction here.

But, Fischer then made a comment about negative rates, that surprised me. Why mention them? Fischer said that “negative rates are clearly out of the question”. Well, if that’s so, why even mention them? I find this mention of negative rates very questionable, and to hold a reason for mentioning them now.

Fed member George said that, “March was firmly on the table as far as potential rate hikes are concerned.”  But Fed member Kaplan is the “Fed should be open to leaving policy unchanged for an extended period of time and that sensitivity to the dollar should be recognized.” Come on boys and girls why can’t you get together on this stuff, don’t you know that it just drives the markets crazy when Fed members sing from different song sheets? My guess is that they do know it, and they choose to do this anyway!

Alright, Chuck, move along before you say something you’re sorry for saying! Let’s see, oh, the rot on pound sterling’s vine continues to spread, as the currency gets hit from two different directions. The First direction is the fear that remains that Britain will leave the European Union (EU). And the second direction is the reversal of the buys that were made when it was thought that the U.K. would be hiking rates.

About a year ago, I highlighted the pound sterling in a Sunday Pfennig, and pointed out that I didn’t believe the promised rate hikes would materialize, and that the pound would suffer when the markets figured out that there would be no rate hikes. The pound slipped below 1.40 overnight, for the first times since 2008. And when this is all said and done, the pound could be looking at 1.25 or worse.

I read a report on the Bloomberg yesterday that weaved a story about how if the pound slipped to lower levels that it would take the euro along for the ride. And so far that could very well be what’s happening to the euro, as it slipped through 1.10 yesterday. At first I read the article with skepticism, but the more I read, the more I saw this scenario with potential to play out.

I would still like to believe that the Eurozone economy’s nascent recovery can take hold, and that would underpin the euro. I certainly hope that’s not wishful thinking, but good old plain educated decision from years of experience in viewing these things.

I mentioned above that the Chinese renminbi saw a weaker fixing for the fourth consecutive session last night. It is believed that January FX Outflows from China slowed to $88 billion, but that’s still a very high number, and so it was right for the Peoples Bank of China (PBOC) to weaken the renminbi in my opinion.

There was another report from China overnight and this one is the scary one to me. China’s Reserves dropped to the lowest level since 2012 in January, as $99.5 billion was taken from the reserves to support the renminbi, bringing the total reserves in China to a still very large $3.23 trillion. The number is still quite large, but the thing that scares me is that it started out a more than $4 trillion and is heading the wrong way.

The news wasn’t too good coming from India either last night. Yesterday, India failed to sell any Treasury Bills at their auction. The Reserve Bank of India (RBI) didn’t accept any bids for 91- and 182- day bills which totaled 140 billion rupees ($2.04 billion). Apparently the markets demanded higher yields from India. Uh-Oh! See, kids, this is what happens when a country gets itself in a bind, and the markets control the bond yields and not the Central Bank. The markets set the bond rates, that’s how it’s supposed to be! And in India’s case, it’s not a good thing, because the markets are demanding higher yields, which increase India’s financing costs. And the rupee takes the brunt of the problems.

Remember the agreement that Russia, Saudi Arabia, Venezuela, and Qatar signed to “freeze output” of oil at current levels? Ok, also remember that Iran was looking at the agreement “cautiously”? Well, Iran got back to the “frozen 4” and told them their plan was “ridiculous”. I guess they aren’t looking at it “cautiously” any longer, eh? HA! Seriously though we have a problem, Houston. And the price of oil reacted accordingly, by sliding lower once again, thus proving that the Traders thoughts that they wouldn’t get fooled again, were the correct ones to have.

And in the land of make believe, rainbows, sunshine and lollipops and balloons, we have a guy that believes that there is no crisis looming, and said this, “This is not a moment of crisis. This is a moment where you’ve got real economies doing better than markets think in some cases”.

Reminds me of 2007, when we had Central Bankers tell us there were no problems, and that the “subprime” situation wasn’t a problem, and so on. Oh, and the speaker of those words above is U.S. Treasury Secretary: Jacob Lew.

Just for the record. In a speech to congress on May 17, 2007, Big Ben Bernanke talked about Subprime:

Federal Reserve Chairman Ben Bernanke said Thursday that he didn’t believe the growing number of mortgage defaults would seriously harm the economy, and that while it was likely that there would be further increases in mortgage delinquencies and foreclosures this year and in 2008, he did not believe this problem would be enough to derail the overall economy.

So, all I’m saying here is that Lew should be careful talking about there isn’t a crisis looming, for those words could come back to bite him where the sun doesn’t shine!

The U.S. Data Cupboard yesterday, had the S&P/Case-Shiller Home Price Index which was up slightly in December, but basically flat. And Consumer Confidence for Feb, which unexpectedly dropped from 97.8 to 92.2. I very large drop, and for once I don’t have to go bananas about who they were surveying that were so confident! Of course the main driver of this report is the stock market. And it sure has be volatile this year so far, eh?

In addition yesterday, Existing Home Sales for January were basically flat, so no gains made here. Today, we’ll see the New Home Sales data for January, and they are expected to show weakness. Other than that, the U.S. Data Cupboard for today doesn’t have much, but make sure you come back tomorrow and Friday, for the Data Cupboard will be showing off, and strutting its stuff for all to see!

Want any more proof that Fear is back in the markets this morning? Well, I have it for you! The U.S. Treasury 10-year yield has fallen to 1.69%…  That’s incredible to me, that this can go this low. So, are the bond boys and girls going to play limbo with the 10-year yield and see how low it can go?  It sure looks that way to me.

With Fear back in the markets gold is back in the driver’s seat. I’ve seen gold up as much as $11 this morning, but right now as I write it’s up $9.  And looking pretty perky to me. This move coming on the heels of yesterday’s $17 gain, after that awful Monday performance. It was a flashback to our old: “Turnaround Tuesdays!”

Silver seems to be lagging these days, as gold rises. Don’t get me wrong here, silver is gaining too, but just seems to be being held back by something. And could that “something” be an increase of the short silver contracts at the COMEX? I think they could be the reason! If I listen long enough to you, I’ll find a way to believe that it’s all true. Ahhh, we come full circle today!

I’ve been talking quite a bit lately about negative interest rates policy (NIRP) and the end of cash, believe me when I say I truly believe that these two are tied together. So, I was excited to see that friend, and publishing giant, Bill Bonner, was talking about NIRP, so let’s listen in to Bill:

We are still aghast and agog over the spread of NIRP – negative-interest-rate policy.

In Japan, for example. where almost two-thirds of government debt carries a negative yield. savers pay a bankrupt government for the privilege of lending it fictitious money.

It is a trifecta of absurdity: First, the money is phony. Second, the borrower is insolvent. Third, the interest rate is less than nothing.

And yet, this is not just some strange fluke or financial skullduggery. Central banks in Sweden, Denmark, Switzerland, the euro zone, and Japan – all of them presumably run by sober adults – have pushed their key lending rates into negative territory, too.

They’re doing this to drive bank lending rates into negative territory. Not only will bondholders pay to lend money to governments but also anyone with a bank deposit will be charged to save money.

And now, the Fed is considering following suit. and pushing its key rate into negative territory.

When asked whether the Fed would consider taking its rates negative, during her recent grilling on Capitol Hill, Janet Yellen left the door wide open:

‘In light of the experience of European countries and others that have gone to negative rates,’ she said, ‘we’re taking a look at them again.’

Chuck again. And then yesterday, out of the blue, Fed member Fischer mentioned NIRP. I too am aghast and agog  over all this, and how it appears that the tracks are getting greased a little at a time. If you keep a journal, you should be recording these baby steps toward NIRP, which will then turn to the end of cash.

And with that, I’ll get out of your hair for today. I hope you have a wonderful Wednesday, and remember to be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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