FOMC Meeting Minutes Deep Six The Dollar

And now… today’s Penning for your thoughts…

Good day, and a happy Friday to one and all!

Front and center this morning, the currencies and metals have taken the conn from the dollar, and are kicking sand in the dollar’s face, as I write. The Fed’s FOMC Meeting Minutes have been pointed to as to blame for the dollar’s problems this morning.

So, let’s take a look at what the minutes had in them that could unleash the Big Dog, euro, and all the little dogs from the porch, and send them chasing the dollar down the street.

Well, from everything I read regarding the FOMC Minutes, the Fed members were all prepared for liftoff, but just couldn’t pull the trigger, and used the excuse that the Global economies were in trouble, and a Fed rate hike would make their troubles even worse.

Here’s my take on this, so sit down, and strap yourself in. (I can see the “reviewers” cringing right now! HA!) To me, this is a ruse. The Fed members know all too well that a few weeks after their meeting that the minutes will be read inside and out, and they used this to pull the wool over the markets’ eyes. They know they can’t hike rates, but found an easy-to-use excuse of the Global economies slowdown, so they talked about it for the minutes, so they wouldn’t have to say the real reason they left rates unchanged.

OK… That’s just my opinion, and I could be wrong. But it’s how I see the way things played out.

But either way, remember last year when I told you that the Fed wouldn’t be hiking rates, and when we got around to the end of summer that the Fed’s credibility would be in question by the markets and that would hurt the dollar?  Well, that certainly seems to be playing out here.

I’m reading report after report from traders and economists, some that even still believe that the Fed will hike rates this year, but think that the Fed’s credibility with the markets has been shaken. And then look at the dollar getting sold like funnel cakes at a state fair this morning, and well, it all seems to be playing out.  I love it when a plan comes together!

And to add to the dollar’s woes, the price of oil has moved over $50, for the first time in 3 months. I can’t tell you if this is just another false dawn on the price of oil moving higher, or whether this time is for real, we’ll just have to wait-n-see, but the way the price of oil has steadily climbed this week one day at a time, indicates to me that there’s something real about this rally.

It’s taken a few weeks, but finally, the Norwegian krone moved ahead of its neighbor the Swedish krona, so all is right in currencies again.  I kid, but in reality, the krone had gotten much weaker after the Norges Bank has cut rates a few weeks ago. So much weaker that the Swedish krona was actually trading with a stronger value/price than the krone.  I had not seen that before. Well, I don’t recall seeing that, and so I pointed it out in the Pfennig at that time.

Well, the recent rally in the price of oil has the Norwegian krone trading stronger than the krona again, and setting things right!

It’s all about the price of oil, for countries like Russia, Norway, Canada, and Brazil, and on the opposite side of the ledger, India. India’s fortunes aren’t tied to price of oil rallying, but instead they are tied to the price of oil remaining in the dumps, for India imports all of its oil.  And with the growing middle class of India, and the propensity of these new middle class people to buy cars. The price of oil become an even bigger thing to India!

The currencies with positive interest rate differentials vs. the dollar, are really solidly on the rally tracks this morning, for it sure seems to the markets now that the Fed is going to leave rates unchanged for the near future, and find any and all excuses to use to explain why they did that. Well, that scenario is like manna from heaven for the currencies with positive interest rate differentials, like the Aussie dollar (A$), N.Z. dollar/kiwi, S. African rand, Indian rupee, Russian ruble, and even the Brazilian real.

Speaking of the Brazilian real… It was reported yesterday, that the legal authorities in Brazil, now believe they have what they need to impeach Brazilian President Dilma Rousseff. Recall, I brought you up to date on Rousseff’s problems a few weeks ago, and said then that should Rousseff get impeached, the real would most likely find the road to rally town much easier.

I reflected back to the last election, and pointed out how during the election process, the challenger had a huge lead in the polls, and the real was rallying every day on that news, but at crunch time, Rousseff pulled off the victory, and the gains in the real were wiped out in a heartbeat. So, that indicates to me that an impeachment of Rousseff would lead to real gains. And given the combination of the FOMC Minutes and the news that an impeachment is possible, the real is rallying. Hmmm…

And the offset currency to the dollar, the euro aka The Big Dog, gets to get off the porch whenever the dollar shows weakness, no matter if the Big Dog has ticks, or fleas, or just a general slow moving nature. The European Central Bank (ECB) meeting minutes from their last meeting also printed yesterday. Didn’t hear about those?

Well, with all the hyperbole around the FOMC minutes the ECB Minutes didn’t stand a chance to get recognized. But don’t worry, you didn’t miss anything. ECB President Mario Draghi, said he is “watching for signs that the economy might need additional stimulus”.

The Japanese yen is one of the few currencies that can’t find its way to the rally tracks this morning, and that makes abundant sense to me! The yen shouldn’t ever find its way to the rally tracks in my  opinion, given all of Japan’s problems that include: debt, deflation, recession, bad demographics, and did I mention debt?  I could go on, but, in an effort to be kinder and gentler, when writing, I’ll pass. But you get the picture!

Well, let’s go at this inflation or lack of inflation in the U.S. once again this morning. I was taken aback by comments made by Fed Chair, Janet Yellen the other day, when she said that, “she believes nearly the entire shortfall in inflation is transitory”.

What, what?  Let me see here… Let’s first look up the definition of the word “transitory”: tending to pass away, not persistent, of brief duration, temporary.

OK… now let’s look at the historical data of CPI since March 2009 when the Fed first implemented QE, And according to the BLS (bureau of labor statistics) the CPI in March 2009 (annualized) was 1.8%…  And last month it was 1.9%…

So, what this index tells us is that inflation in six years, as recorded by CPI, has gone up slightly. Six years of ZIRP, five years of QE, and throw in a couple of stimulus measures, and you still have inflation that refuses to gain traction even with these highly inflationary things (we thought!). So is six years of data of low inflation, enough to say that it’s not “transitory”?  I think so!  Inflation has ventured to above 2% in the past 6 years, 11 times.

So, in my humble opinion, The BLS needs to drop their hedonic adjustments so we get an actual reading of inflation, or. we need to stop calling this low inflation “transitory”.

Oh, and Fed member Kocherlakota was speaking yesterday, and said that the central bank should provide MORE, not less policy accommodation to spur jobs growth at a pace similar to the gains seen last year. But not to give the markets a clear direction as to what the Fed is thinking, Fed member Williams, decided to tell his audience that the Fed still feels there is room to hike rates in 2015.

I read an article yesterday that highlighted the comments that came from a press conference that Big Ben Bernanke and Tim Geithner held at a book signing. Bernanke said that the Fed is “very transparent”.  Really? And I guess if he were asked he would have said they all sing from the same song sheet too!  Amazing, simply amazing.

Well, look at gold this morning! The shiny metal has finally moved above $1,150. Gold had struggled for some time now to gather up enough rallies to move past that level, and this morning, it has done so!  Silver has finally moved past the $15 handle, and palladium, which has been the star performer of the precious metals, continues to book gains. As I said the other day. Gold and the other metals got whacked again and again when the talk was all about how the Fed was going to hike rates (remember? 2 times this year?)

So, it makes a lot of sense to me now that those rate hikes have been put on hold, that gold grabs back some of that ground that was lost when rate hikes were the talk of the town.

The U.S. Data Cupboard doesn’t have much for us today. We will see the drop in import prices from the stronger dollar, but this isn’t really market moving data. When the markets return next Tuesday, September Retail Sales awaits. I have to say that the BHI (Butler Household Index) indicates that this data will be disappointing again. I bought a lot of books in September, but other than that, things were pretty quiet around here, purchasing wise.

So, I guess I’ll mention it again on Tuesday, but watch for this data, as I think it will be disappointing, and that will add to the not only the dollar’s woes, but the rate hike campers’ woes..

Well, there sure has been a ton written and said about China’s slowdown. Some have gone out on the limb and said the Chinese economy will collapse, some say it’s all doom and gloom, and some say that it’s just an economic cycle slowdown after years of double digit growth. Longtime readers know which camp I’m in.  And according to the Deputy Gov. of the Peoples Bank of China Yi Gang, Chuck is in the right camp!  Let’s listen in to what Yi Gang had to say at the IMF’s boondoggle in Peru.

When Yi Gang was asked about the challenges facing China in carrying out their objectives to make the transition to a new growth model and a more market-based financial system, Yi responded.

‘I would say don’t worry.’

He insisted that Chinese imports of raw materials will grow steadily.

Chuck again.  OK, first and foremost, I forgot to give you the link to the story, which you can find here.

And secondly, don’t you just love these Chinese officials? Everybody is running around like Chicken Littles and he says, “Hey don’t worry, be happy”. Gotta love it!

Well, it’s time to get off this bus today, but not before I wish you a fantastico Friday!

Regards,

Chuck Butler
for The Daily Reckoning

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