Hail, Hail, The PPT Is Here!

Today’s Pfennig for your thoughts…

Good day. And a Tom Terrific Tuesday to you!

Whew! What a day in the markets yesterday! I was worn out just watching the screen with moon shots up, and deep well plunges down. The day had everything. And today’s currency action seems to be picking up where yesterday left off! It’s crazy out there folks, you had better go to the sidelines, and see where this all plays out.

Well, that’s where you’re going to find me, so maybe while we’re there, we can get a cup of coffee, and sit down and talk about the weather, the Cardinals, or the upcoming NFL season, anything to take our minds off these crazy, wild swings in the markets.

Whoa! What a rubber band snap we had in the currencies yesterday, namely the euro. I had told you early in the morning that the euro had pushed through the 1.15 level. But that was just the start. At that time the U.S. stock futures were down 350, but they soon moved to down 650, and the buying of euros just kept going, and soon the euro was trading around 1.1575, WOW!

But that’s not all folks!

If you call right away, we’ll include the new Wham-o knife that will cut through steel! HAHA!

No wait! What I wanted to tell you about was simply that the euro didn’t stop there!  The U.S. Stock market then opened up and immediately fell 300, 400, 500, 600, 700 and more points, and the panic buying of euros went through the roof.

Within 20 minutes the euro added another full cent, to 1.1675, and again it didn’t stop there, the euro kept rising as the U.S. stocks kept getting sold, and soon it was 1.1750! A more than 2.5-cents move in just a few hours!

It was at this point that I told a colleague, that this is where the PPT would step in. And then just like that, the U.S. stocks on the Dow came back strong, wrapping a tourniquet around the bleeding and brought their down figure to 350 down (stocks closed down 588 on the day after gyrating all day). And that also brought the euro back to reality.

The single unit was still up very nicely on the day to 1.1585, but not as nicely as the 1.1750 it touched earlier in the morning.

I would bet euro traders everywhere were whipsawed. Customers wanting to lock in prices and traders trying to keep track of what prices they had quoted, and so on. Crazy, folks. Those are the days that at the end of the day, and the risk position is within parameters, that traders make their salary.

OK, are some of you scratching your heads and asking, when is he going to tell us what he was talking about regarding the PPT? Well, I’m glad you asked, because I’m going to do that right now!

PPT stands for Plunge Protection Team, but their real name is “The President’s Working Group on Financial Markets.”

This group was created by executive order in 1988 by President Reagan. It consists of the U.S. Treasury Sec. , the Chairperson of the Fed, The chairperson of the SEC, and the Chairperson of the Commodity Futures Trading Commission (CFTC), and they were created after the bloodbath that is otherwise known as Black Monday, or the October Crash 1987, in order to shore up the markets — and some say to even manipulate them.

But I won’t go there, I’ll just say what the Forbes said yesterday; “U.S. Plunge Protection Team Out In Force This Morning”.

So, that was yesterday.. a very crazy day indeed! And this morning, it appears that we could be right back to the whipsaw. Like a ride at a carnival, U.S. stock futures are up sharply this morning, indicating that the stock market will open up on the strong side in a couple of hours.

And the currencies? Well, it looks like it’s Opposite Day. Yesterday, we had the euro leading a group of currencies higher, while the Asian Trading partners of China got taken to the woodshed.

Today, it’s the exact opposite, with the currencies from the Eurozone, Japan, Poland, Hungary, Czech Republic, Switzerland and in a smaller move down England, all getting sold down the river, while the currencies from Australia, New Zealand, Singapore, S. Korea, and Mexico all faring much better today than yesterday. It’s Opposite Day!

Well, China announced a rate cut overnight, and their first depreciation of the renminbi in the last 5 trading days. The rate cut was 25 Basis Points or 1/4% to the deposit  and lending rates. The Chinese continue to do what they think is needed to spur economic growth. I wish they would just leave things alone. Sure, a rate cut here and there helps, but I’ve long said that interest rates in a country shouldn’t be set by a Central Bank, but rather the markets.

The markets see recessions long before Central Banks see them, and therefore the markets would react accordingly. But in a country like China, where they are opening up, but still not 100% market driven, this would be difficult to do, given that the markets are not in control of anything right now.

Oh! And China also reduced their Reserve Requirement for Banks by 1/2%…

The euro has lost 1.5-cents and so too has the Japanese yen in the overnight and morning sessions, so believe it or don’t, but the euro is right back to where it was yesterday, when I first began talking about it 1.1485.

German Business Confidence as measured by the think tank IFO, rose this month to 108.3, from 108 in July, and the consensus forecast of 107.6. I think that this IFO report is very important because Business Confidence is what drives an economy folks. If the businesses have confidence, they’ll hire, give raises, make capital investments, and so on, and these are the important things for an economy.

So, all-in-all, I would say that Germany’s growth path is still on track to continue improving, and dragging the soft economies of the Eurozone along.

The final print of second QTR GDP in Germany was bang on expectations of 0.4% growth or 1.6% year on year.  Now, let’s do a quick calculation on the back of a cocktail napkin here. Let’s see, here in the U.S. GDP numbers have been jacked up by 3% annually from the hedonic adjustment last year of research and development being added to the GDP calculation. So, the last reading of second QTR GDP, annualized,  here in the U.S. was 2.3%.

So, take away 3%, and before last year, the U.S. GDP would have been -0.7%. And there you have it. Without the hedonic adjustment of GDP from last year, things wouldn’t be looking good in the eyes of the Fed.

OK, that was fun! Doing some math! I love it! I was never a math-whiz in school, were you? My two boys were math whizzes, but I’m not sure what it got them, except more difficult classes!

Gold is down another $6 this morning. Yesterday, I told you early in the morning that gold was down $6, but later in the letter I said that gold had rallied back to flat on the day so far. But that rally was short-lived, and soon after sending the Pfennig out, gold was back in the red, and ended the day there.

And now today, it is starting out the day in the red. I read in a GATA release that Market Analyst, Mike “Mish” Shedlock, who has always taken the GATA folks to task for what he calls “their screaming about gold price manipulation,” has finally seen something that he questioning.

Let’s listen in to Mish Shedlock:

That said, someone sure benefits from these the middle-of-the-night plunges at illiquid times. So put me in the group wondering who that is, and what if any laws were violated in doing so. And if laws were violated, let’s have an accounting, as well as a look at the laws.

Hmmm… Interesting, very interesting, don’t you think?

Mish Shedlock is a very well respected analyst, and these middle-of-the-night plunges in the price of gold have caught his attention.

The U.S. Data Cupboard is chock-full-o-data today, starting with the S&P/CaseShiller Home Price Index for June. Some Markit Services data. New Home Sales for July. Consumer Confidence for August and a regional PMI from Richmond.

The Consumer Confidence forecast is interesting to me in that the so-called experts think the index will increase from 90.9 to 93.4. That’s a strong increase folks, and I’ve always been a believer that this Consumer Confidence index was a direct reflection of what’s going on in stocks.

So, if that’s the case, why would the “experts” think the index is going to show an increase? Beats me! But I’m not going to lose any sleep over it. So, let’s just move along, for this is not the droid we’re looking for!

Something strange happened in the Treasury markets yesterday. The yield of the 10-year, which yesterday morning stood at 2.00%, and touched below that briefly in the early morning trading, saw a reversal and the yield rose to 2.07%…

Now, that would simply mean that bonds were getting sold. A reversal of the buying that took place the previous night. I really thought that given the new markets feeling that the Fed won’t hike rates next month, that Treasury yields would continue on a downward path.

Well, come on Chuck! The 10-year yield is still pretty darn low at 2.07%! You dolt! Yes, I guess I am. Oh well, Treasury yields rose, the price of oil rose, and gold didn’t rise. Two out of three ain’t bad, now don’t be sad, because two out of three ain’t bad.

The European stock markets are all in the green this morning, and like I said above, the U.S. stock futures indicate a good open for U.S. stocks. Is this like the guy that’s on his deathbed, feeling strong right before he croaks?

Sure looks that way to me. But then I’m not even your last choice for a stock jockey, I just call ’em the way I see ’em. Remember picking teams when you were young? Kids today, don’t have any idea what that’s about, as they don’t play sports without adult supervision. But when I was a kid, we went to the park, which was 5 blocks away, and picked teams and then played ball all day, without an adult in sight!

But anyway, picking teams, I always felt bad for the last kids to get picked. They knew they weren’t very good, and so did everyone else, and. they didn’t get a trophy for participation!  But that was a cruel way of doing things, but kids are kids, and they say and do cruel things, but at least those kids that got picked last, had a choice, they could work at getting better, or they could continue to be picked last.

Oh, brother, did I ever go off on a tangent there! Sorry about that!  I have a theory about all this youth sports stuff and if you’re ever on the Butler Patio, I’ll tell you. But I can’t do it here.

I wanted to send out a big thank you to my friends over at the Daily Reckoning where they are now posting the Pfennig again after a long layoff. DR editor Peter Coyne, said he would get it back on the DR and he did! So, thanks Peter! Hopefully your readers will find it to be worth their time each day.  I actually saw the Pfennig on Google+ last night, as the DR also sent it there! WOW! Talk about taking care of me! I hope everyone that hasn’t seen the DR in some time, go to the website and take a look, I think it plays well in the sandbox with what I’m trying to do here each day.

Well, this is special today, as I have something from the very well respected analyst, Jim Grant. I read James Grant’s Interest Rate Observer each month, and know all too well that I can’t quote anything he says in it, so when I see him getting quoted outside his letter, I’m all over that like a cheap suit!

And so it is today, as I found this on Ed Steer’s letter, which you can find here.

Jim Grant appeared on CNBC [yesterday] morning with an explanation of the underlying reason why United States stocks just plummeted. His core message is that capitalism requires both success and failure. When central bank monetary policy corrupts pricing as thoroughly as it currently has, it ruins the market’s ability to withstand healthy business failures.

Grant doesn’t talk about it in this interview, but just a month ago he reminded us of the best assets to hold as protection from this distorted financial world – precious metals.

“The prices themselves are the cosmetic evidence of underlying difficulty. So if you misprice something, it’s not just the price that’s wrong, it’s the thing itself that has been financed by the price. So you have perhaps too many oil derricks, too many semi-conductor fabs. We have too much of something, which is financed by an excess of credit or debt.

That, to me, is the essential back-story to this morning’s difficulties. It’s the mispricing of asset values, led by central banks who think that by inflating or lifting up stocks, bonds, real estate, they will thereby engender prosperity.  – James Grant

Chuck again..  I don’t think I can add anything when Jim Grant speaks.

And with that, I’ll get out of your hair for today. I hope you have a Tom terrific Tuesday!


Chuck Butler
for The Daily Reckoning

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

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