FOMC Meeting Minutes This Afternoon

Today’s Pfennigfor your thoughts…

Good day, and a wonderful Wednesday to you!

I think the Fed members are going back to look at their plan these days. Their plan to hike rates two times in 2015, has to be questioned now that it appears that global growth is circling the bowl. But then, that’s just me thinking through it all.

I read a report this morning that talked about how “when” the Fed hikes rates next month, that consumers, and the markets are not going to give two hoots about the hike, as it has been well telegraphed and had plenty of time for pricing the rate hike into the markets.

I have to say that the writer was pretty darn sure that the Fed was going to hike rates next month, so kudos to him for that conviction. But the idea that the Fed is going to hike rates is all wet in my opinion. I’ve gone through that so many times, I’m beginning to sound like a broken record.

The markets are beginning to look as though they are more concerned with the decimation of global growth. And rightly so, I would think!  But what will they do about that? They’ll get on their horses and ride to the next bond house, and buy bonds. That’s what happens when economic growth goes south, so do yields on bonds.

But wait! Bond yields are already south, where can they go from here? I guess we’re going to see folks…

Well, the dollar is softer this morning for the most part ahead of the Fed’s FOMC Meeting Minutes that will print this afternoon. I don’t know that the markets are going to find what they are looking for in the minutes, but then I’ll use the old pitcher for the Cardinals, Joaquin Andujar, and his favorite word — “You never know”.

But I think they will be looking for any signs either way, that give them a clearer direction that the Fed will take next month. I read a research paper last night, and in it the writer stated, “The economists of the world, all think the Fed is going to hike rates next month, while the markets don’t believe that”.

I thought, hmmm… I wonder when the markets came around to that kind of thinking, because it wasn’t that long ago, that me, Jared Dillian, and James Rickards were the markets guys that were saying there would be no rate hike.

So, the Chinese renminbi gained another 30 pips last night, making it two consecutive nights of 30 pip gains. I don’t think gains this small tell us anything really. And like I said yesterday, I think it’s just the Peoples Bank of China (PBOC) doing some adjusting of the devaluations last week.

There’s been no data, no new revelations from China the last two nights, so that why I’m on that thought about the adjustments.

Last week, I told you that the Chinese devaluations were going to lead to either devaluations or outright depreciations from respective Central Bank intervention of the other Asian and Pan-Asian currencies, and a quick look at what’s gone on in the past week, shows that to be quite true:

The Singapore dollar (S$), Malaysian ringgit, Taiwan dollar, Thai baht, Korean won, and others are all down significantly since the first devaluation was announced. The Thai baht has seen a couple of devaluations since last week and so on.

I read last week that the markets were looking for the emerging markets to suffer the most from the Chinese announcement, but it appears to me that the Asian currencies are suffering quite a bit.

But it’s not just the Asian and Pan-Asian currencies seeing their values drop, the currencies from countries that are large trading partners with China, like S. Africa, and Brazil are also seeing their respective currencies drop in value. The euro and the yen have basically come out of this past week with the Chinese devaluations unscathed.

Size does matter folks. the U.S. and Eurozone are the largest economies, tied for first, then comes China, then Japan.  So, the U.S., Eurozone and Japan all skated by the Chinese devaluations.

Speaking of Japan — I spent an inordinate amount of time yesterday talking about Japan and their last 20 years of economic debacle. And then last night Japan printed their latest Trade Balance for July, and unfortunately, their “balance” has become a deficit (remember when you could bet the farm on a Japanese Trade Surplus each month?).

And in July, their Trade Deficit widened to yen 268 billion. But then with global growth circling the bowl, what else would you expect here?

Well, I was incorrect with my assertion that the Greek Bailout/aid package had been put to bed, there was one more entity, the German Bundestag, that had to vote on the Package, and the news just came across that they approved it. Whew! I was sweating that one out, along with the Greeks! HA!

The euro is up a small bit this morning, no great shakes. You know, I’m beginning to feel like the markets don’t listen to me. HA! As If!

No, seriously. why don’t they? I mean, I told them all about the tale of two current account balances of the two largest economies yesterday, and they did nothing!

Well, the markets can be fickle, and slow to react at times, so maybe it will take a daily beating of the fact that the Eurozone has a Current Account Surplus and the U.S. doesn’t, to get them to treat the euro better.

Another short talk with the Big Boss, Frank Trotter, led to me researching something I had never crossed before in school or elsewhere. First, we talked about an article that a reader had sent to me to read and comment on. The article’s lead headline was: “Greece and the Gold Drachma, a possibility for returning to solid fiscal and monetary policy?”

I first laughed out loud, at the thought that Greece could “return” to solid fiscal and monetary policy, when they never had them to begin with! Well, at least not in the 33 years that I’ve been around foreign markets! Should I remind you of the 18, 19 and 20% yields that were available in Greek deposits instruments before the euro came along, because Greece had a problem attracting investments into the debt ridden economy? I didn’t think so.

So, anyway, that’s what we first discussed, and how the new proposed gold backed drachma would have to be a 2-currency system, with trade between Eurozone countries still done in euros. We both laughed out loud at the idea of a 2-currency system. Then Frank mentioned something that I was shocked to hear. He said, “Well, the Incas didn’t even have a currency”.

There was some disappointing news from Norway overnight. The world’s largest Sovereign Wealth Fund lost $8.8 billion in dollar terms in the second quarter, their first decline in 3 years. The $8.8 billion represented a -0.9% decline, and the main loser came from their bond holdings where there was a 2.2% decline in bond values, due to higher yields around the world.

Norway’s Sovereign Wealth Fund is a smart way to handle their oil revenue, as Norway places most of their oil revenue in the Fund, to avoid overheating the economy. Which leads me to something that I was thinking about the other day…

Sure, oil revenues are down big time for Norway, but hasn’t the Norges Bank been on the “pump up inflation” campaign for the last two years? Well, if putting some of the oil revenues into the economy could overheat the economy, but overheating is the least of your worries right now, wouldn’t it be prudent to go ahead and do just that for a little while, while oil revenues are down anyway? It couldn’t hurt, right?

Well, that’s my solution to the Norges Bank’s dilemma, and I’m sticking to it!

As the morning has gone on, the softness in the dollar has faded, and the currencies are giving back some of their gains as I write. I guess the NY Traders arrived, and said, “What’s this? The FOMC Meeting Minutes print this afternoon, and then we’ll all be talking about a rate hike next month, so to hell with this dollar softness!”

Gold is up $5 this morning. No make that $4, as it just dropped a buck!  I read this morning that India reported that their gold demand this year is up 11%, and by 936 tonnes. And again, I’ll make a fool of myself with the naysayers of gold price manipulation, by asking the question, how does strong demand for gold equal a drop in the price of the metal?

Well, anyone that agrees with me that this is all wrong, and for no other reason but manipulation using paper trades,  will not argue with me here, but I know a few very smart people that don’t agree with me, and I guess I’ll have to take my lashings later from them!

The U.S. Data cupboard only has the stupid CPI (consumer inflation) for us today. And then hidden behind the stupid CPI report will be the “real average weekly earnings year on year, which should show an increase of around 1.8%…  Hmmm, wages still going nowhere, eh?

So, have you ever wondered why all the Fed’s measures for wages seem to lead them back to the square that says wages haven’t increased, and that keeps inflation at bay?

Well, maybe they just use the wrong measures.  But that’s not what I’m leaning toward with this discussion.. My question really is why haven’t wages increased to show wage inflation in the now 6th year of recession recovery?

It’s been a decade since the Fed last hiked rates, and borrowing rates remain at all-time lows. So, it’s not like the economy hasn’t had stimulus to grow, which would increase employment, wages and eventually wage inflation.  What’s keeping the U.S. economy from economic growth that would generate the employment, wages, and wage inflation?

Well, I’ve told you all before what I believe it is. Too much Debt.

Yesterday, I spent some time talking about Japan and their ordeal with their economy and their attempts to stimulate it for 2 decades now. What do Japan and the U.S. have in common here? That’s right, Too Much Debt.

So, it could be the measures the Fed uses that keeps them coming back to square one, but I prefer to think that it’s too much debt. Simple Simon.

You have to wonder where all the media hype that surrounded the Greek debt problem back in 2011 to today, has been as the state of Illinois, which is a much larger economy than Greece, entered into a “technical default”. That’s the story for FWIW this morning, and comes to you from the folks at www.businessinsider.com/

Here are a couple of snippets to whet your whistle:

In what has been a not-so-stunning turn of events over the last week, the State of Illinois has failed to appropriate funds on a certain class of its outstanding appropriation-backed sales tax debt issued by the Metropolitan Pier & Exposition Authority (Met Pier).

The mechanics of this missed payment mirror Puerto Rico’s default on its appropriation-backed Public Finance Corp. (PFC) bonds earlier this month.

To be sure, Illinois has not missed a payment on its outstanding debt. It has, however, failed to make a monthly payment to the trustee for a December 15th payment, a covenant breach that constitutes a “technical default”- not a payment default, but typically the first step that fallen angels take on the way to a payment default.

In mid-July Puerto Rico failed to appropriate funds to a trustee, which later resulted in a payment default on a class of its outstanding debt.

Chuck again. And again, missed by most news outlets, the ratings agency S&P downgraded Met Pier on August 5th, from AAA to BBB+.

The inside on this all is that S&P didn’t downgrade Met Pier for their fundamentals, but more for their arms-length relationship with the state of Illinois, and their $6 billion payment backlog to fund its pension system.

Yikes! This is real nasty stuff folks. and yet I had to dig to find this.

Well, I’ll get out of your hair for today, and hope you have a wonderful Wednesday!

Regards,

Chuck Butler
for The Daily Reckoning

P.S. The Daily Pfennig is first published everyday, right here.

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