Guess Who's Selling Their Treasuries Now?

And now… today’s Pfennig for your thoughts…

Good day, and a marvelous Monday to you!

We start the week looking to the Fed’s FOMC meeting on Wednesday. I’m going to climb back up on the horse that I got knocked off of last month when the Fed hiked rates, and see if I can stay on the horse for as long as I did before last month.

What that means for all you new to class is that I’m going to say that the Fed will leave rates unchanged this week, and while they won’t entertain any thoughts about reversing their rate hike just yet, they will acknowledge that their confidence regarding Monetary Policy is not as strong as they would like it to be.

That’s what weak economic data prints that just keep coming at them like the snowflakes that came down north of here this past weekend, will do to someone’s confidence. The Fed will acknowledge the market turmoil since their rate hike last month.  But, I think they can rest in the knowledge that while the rate hike may be a component of what’s fueling this market turmoil, it’s not the Big Kahuna.  That title is reserved for the price of oil, and then coming in second is the goings on in China.

So, China, oil and the Fed rate hike, have worked hand in hand in bringing us all this market turmoil.  But for now, it’s about the price of oil more than anything. A couple of weeks ago it was about China, and who knows what will come next.

The currencies are getting sold for the most part this morning, although there are some currencies carving out gains vs. the dollar. They include: the euro, Czech koruna, S. African rand, Chinese renminbi, and Danish kroner. Not many on that list, eh?  Well, there is a handful more of currencies that are down a bit but for the most part they are flat this morning, including the N. Zealand dollar/kiwi, Hungarian forint, Polish zloty, Singapore dollar, and the Swiss franc. I list these because it wouldn’t take much for them to turn positive this morning.

Since I made a big deal about the price of oil above, I guess I should tell you that the price of oil is basically flat this morning, which is a nice change, given last week’s volatility for Black Gold, Texas Tea. But being flat on the day, doesn’t appear to be enough to keep the volatility down for the Russian ruble, which on Friday had one heck of a rally, but today is getting sold again by the bushel full.

In fact all the petrol currencies are seeing their gains from Friday get chopped. What? A flat day isn’t good enough for these traders? They have to see a 4.5% gain in a day for oil or else they’re going to take their bat and ball and go home?  That’s certainly how it looks to me!

The Chinese renminbi was allowed to appreciate in the fixing overnight, and while that’s something to speak of in itself, the thing I want to point out is that the Indian rupee didn’t follow in step with the renminbi. Not that these two are connected at the hip or anything like that, but they do seem to move in tandem an awful lot!  And the rupee is getting sold this morning, while the renminbi gets fixed at a higher level. Interesting…

The Canadian dollar/loonie, saw some volatility last week, as it gyrated with the price of oil. On Friday, the loonie got the slot machine jackpot of a triple cherries, when the price of oil surged, saw their year on year inflation rate rise to 1.6%, and saw their November Retail Sales (really? November? What are you still using an abacus to count?) jump higher by 1.7% vs. just a 0.1% gain in Rocktober.

So, everything was coming up roses for Canada on Friday, but today it’s different.   I just can’t get over the fact that we’re almost to February and Canada is just now releasing November Retail Sales data. I can see the guy with the visor on in the back room, adding them up, with adding machine tape all over the floor, and I can hear him… let’s listen in:  “ok, that’s a 9 and carry the 7, and Oh, my goodness these numbers are so big, how do they expect me to add them all up?”  HAHA!

German Business Confidence as measured by the think tank IFO saw its January index number fall to 107.8 from 108.6 in December. But just like when the IFO number was rising, and didn’t lend any credence to a euro rally, the euro is ignoring this data, and rallying vs. the dollar this morning.  Calmer heads must be coming to the forefront, and pointing out what I pointed out last Friday, and that is that European Central Bank (ECB) President, Mario Draghi, said the ECB “may” look to use additional stimulus, he didn’t say they “will use additional stimulus”.

Draghi is a master of using verbal intervention. This man can get the markets to do stupid pet tricks with just words. He gets more mileage out of words and not actually having to implement stuff than any Central Banker in history.  He’ll attempt to get the results he wants without actual policy changes, and in this case he’s trying to simulate the economies of the Eurozone to get off their duffs and get moving!  Good luck with that Mario. You’ll need it!

Later this week, the Eurozone will see the January CPI year on year estimates. I expect to see their consumer inflation as represented by CPI, inch upward from 0.2% to 0.3 or 0.4%… depending on how the beans are counted… A print like this would really help the euro, folks, for a rise in inflation would mean that the Eurozone has come out of the deflationary spiral they were in.  Not by a large margin, but by a positive margin, and that’s important!

The data from the U.S. Data Cupboard was mixed on Friday, with Existing Home Sales rebounding from their huge drop the previous month, but the Leading Index went negative. I told you on Friday that the Leading Index is one of the few forward looking pieces of data we see, and that I thought it would be disappointing, and it was just that printing a negative – 0.2%..

If I were a betting man, I would be putting my money on what the Leading Index is telling us rather than what Existing Home Sales had to say. Data, is data, here in the U.S. it can be manipulated, massaged, rolled, cut, and cooked before we get to see it. And leaves observers like me, suspicious of any report the government prints.

I’m of the opinion that in the case of the Leading Index, that it was either “adjusted so it didn’t look so  bad” or the index really did fall -0.2%…  And in either case, all it does is tell me that I’m still going to end up being bang on with my call that the U.S. economy is headed to Recessionville, and could very well be there already!

We have a real problem, Houston, and the meeting in Davos, Switzerland isn’t going to see anything come of it that fixes the problem. One way or another folks, we’re headed in the wrong direction with the economy, might as well, buy your ticket now, and take your seat on the train to Recessionville…

The U.S. Data Cupboard doesn’t have anything for us to view today, other than a third tier report..  The Dallas Manufacturing index.  Just another regional that will probably show us that Manufacturing is in deep dookie.  Oh, and in another sign to everyone that wants to add up the signs like I do, that the economy is in trouble. Boeing Co said on Thursday it will cut production of its 747-8 jumbo jet in half and take a $569 million charge in the fourth quarter as it faces dwindling sales.

Gold is up $7 this morning, and is back over $1,100. Ed Steer told me this weekend that 701,000 Troy Ounces of physical gold has been deposited at GLD so far this year.  So, for those of you new to class, GLD is the paper ETF that mimics the price of gold. When investors buy or sell in the ETF the trust company that runs the ETF has to buy or sell the physical gold to balance the books.

So, if 701,000 Troy Ounces of physical gold has been deposited so far this year, that tells me that the GLD ETF is a hot piece of paper right now. And physical spot gold has increased 4% so far this year. Silver has increased nearly 3% (at 2.72%) and Platinum and Palladium are in the red.

I have to say that this article has gotten a lot of air play on just about everyone’s ( that I read ) radar and letter. So, you might have seen this already. But I thought it played nicely in the sandbox with my carrying on about a Liquidity Crisis last week. Here’s the link to the whole article, and here’s a snippet:

It’s a secret of the vast U.S. Treasury market, a holdover from an age of oil shortages and mighty petrodollars: Just how much of America’s debt does Saudi Arabia own?

But now that question — unanswered since the 1970s, under an unusual blackout by the U.S. Treasury Department — has come to the fore as Saudi Arabia is pressured by plunging oil prices and costly wars in the Middle East.

In the past year alone, Saudi Arabia burned through about $100 billion of foreign-exchange reserves to plug its biggest budget shortfall in a quarter-century.

A big risk is that the kingdom is selling some of its Treasury holdings, believed to be among the largest in the world, to raise needed dollars.

Chuck again. Pretty interesting that Saudi Arabia’s Treasury Holdings have never been detailed and made public. According to Edwin Truman, a former Treasury Asst Secretary in the 90’s this deal to not disclose OPEC’s holding came about “Because relations were rocky and the U.S. needed their oil, the Treasury “didn’t want to offend OPEC.” I don’t think we need to give OPEC any “special treatment” any longer do you?

That’s it for today. I hope you have a marvelous Monday!


Chuck Butler
for The Daily Reckoning

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