It Could Be The Renminbi's Special Day

And now… today’s Pfennig for your thoughts…

Good day, and a marvelous Monday to you!

It’s November 30th.. YAHOO! My most despised month have come to a close! But do you know what else today has in store for us?  Well, today is the day that the IMF is meeting and most likely will announce that they will add the renminbi/yuan to their currency basket that makes up SDR’s (Special Drawing Rights).

Yes, that’s right!  The 30th of November!  Now the actual movement of renminbi into the basket won’t take place until next Rocktober, but the announcement is scheduled for today.  So, there you go! After years of preparing for this, Chinese leaders will finally get to sit back and smile about all their difficult work in getting the renminbi “ready for prime time”.

But being added to the IMF’s basket of reserve currencies wasn’t enough to get the renminbi on the appreciation side of the ledger today.  But the renminbi is not the only currency closing out November on a sour note. In fact, for a lot of the currencies, this has been a real bummer of a month.  Of course not for the Central Banks that are driving their respective currencies lower, but for the currency itself, and of course the holder of that currency, it has not been a good month.

I told you about 10 days ago, what the end of this week has in store for us, and it’s all still there, waiting to unfold like a newspaper being read on a bus.  And first up will be European Central Bank (ECB) President, Mario Draghi. He of the “Whatever it takes to protect the euro” speech from a few years ago, will most likely throw the euro under the bus, and announce the ECB’s intention to implement addition stimulus measures, because inflation is still being a difficult nut to crack. And euro traders have already begun to push the euro lower on this thought about what the ECB will announce on Thursday.

As if things aren’t going to be rough enough for the euro on Thursday, Janet Yellen would be flagged for a piling on penalty if she were playing football, but she isn’t, she’s directing monetary policy, and on Thursday, she’ll make a speech on monetary policy to lawmakers, and it is widely thought that she’ll grease the tracks for a rate hike, which will get the rate hike campers all lathered up and buying dollars. A double whammy for the euro on Thursday.  And then to put icing on the cake, on Friday, we’ll have the last Jobs Jamboree before the Fed’s FOMC Meeting on 12/16.  I sure hope nobody left the cake out in the rain, and all the sweet green icing is flowing down.

Speaking of the “rate hike” by the Fed.. Another one bites the dust, yeah, another one bites the dust.  Yes, I’m channeling my inner Queen this morning, singing their song in my head, for you see, another of the few, the proud, the naysayers to a Fed rate hike in December, as crossed over and now says that he believes the Fed will hike rates in December.  That pretty much leaves me out here on the limb by my lonesome. All by myself. But that’s the way it looks, Chuck.

First it was Jared Dillian, and now it’s James Rickards doing the old switcheroo.  But I don’t throw stones their way or anything like that. They have their reasons for changing their opinions, and have done so, using the old saying that’s attributed to Keynes, but I don’t think he ever really said the words. When things change, I alter my conclusions. What do you do sir?

Oh, that stings. It stings mightily, for I haven’t changed, and that old saying makes me out to be a real dolt for not doing so. Well, so be it. I’ll be wrong about it, but I’ll still get up the next day (gold willing), and  live my life.  Sure I will have disappointed some people for being wrong, but in the end it will be that I was wrong for choosing sides.  If the Fed does hike rates, they’ll have done so for the wrong reasons.

The economic data doesn’t warrant a rate hike, so they must be doing it to 1. Have some room to maneuver when the economy goes sour, or 2. To save face with the markets, for the Fed sure has opened Pandora’s Box of rate hike expectations with the markets and to back down now would be very costly to them.

But more costly than the economy going sour almost immediately after the rate hike. Because think about this folks; once the rate hike Barn Door is opened by the Fed, the expectations of additional rate hikes will start, and that thought alone is enough to make businesses hunker down, investors to pull money from other assets and begin to deposit in interest bearing instruments, but certainly not “spending”, and the overall feeling in the economy to be dampened with the thought of additional rate hikes.

Well, that’s how I see it, from my view in the cheap seats. My wife says I don’t see very well, and that’s why she won’t ride with me if I’m driving any longer. I say, no worries, I see just fine with one eye! So, don’t listen to her! I can see just fine, and while I see this unfolding, it may not be imminent.  We may have to wait to see it all unfold. Are you ready? Hey are you ready for this Are you hanging by the edge of your seat? Out of the doorway the bullets rip, to the sound of the beat. Another one bites the dust, another one bites the dust.

To follow all that up… In Friday’s local paper, there was an article on the Fed, and how they might have to begin to rethink the tools they use to guide an economy.  My first thought was, “Really?”  They’re just now “beginning” to realize that? Because zero interest rates didn’t raise inflation, and three rounds of bond buying didn’t raise inflation. What’s a Fed to do? I did find a quote in the article though that I thought played well with what I was just talking about above, and that is the Fed Rate Hike.  Fed member, Charles Evans, who is the President of the Chicago Fed, who has been a dove, had this to say, regarding the Fed hiking rates, while the rest of the world continues to cut rates and export their deflation to us:

We have had different points in time since the downturn where certain regions of the world thought they could de-link against the rest of the world. There’s often a TRAIL OF TEARS that follows that hope that their own area is stronger.

Well. I would have to think that he was sending that message to his fellow Fed members, don’t you think? But I also believe he was referring to the ECB, and Sweden’s Riksbank, who back in 2011, hike rates, when everyone else was not sure which way to go with rates, and it didn’t take long for those two Central Banks to reverse those rate hikes.

So, good for Evans. I think pointing to the “Trail of Tears” was a good thing to lay out before the Fed members that think a rate hike is the end-all.

Well, the dollar has the conn for the most part today. The Swedish krona, Mexican peso, New Zealand dollar/kiwi, Indian rupee and Russian ruble are the only currencies carving out gains vs. the dollar this morning, with the Aussie dollar (A$), Japanese yen, Swiss franc, Hungarian forint, S. African rand, and Singapore dollar, all pretty much flat and are either up a tiny bit or down a tiny bit, so basically flat on the day so far.

The Best performer overnight is the Russian ruble. We saw some of this last week, with the ruble one day being the best performer, and the next day being the worst performer. As I’ve said a couple of times in the relatively recent past, I think the ruble is going to be a range bound currency as long as the Sanctions are in place, and the price of oil remains subdued.

Along with the ECB meeting on Thursday, we’ll have a few Central Bank meetings take place this week. The Reserve Bank of Australia (RBA) meets tonight (for us, tomorrow for them) and I’ve already beaten this one to death, given the comments by the RBA Gov. Stevens in November that it was time to chill out and come back in February, so given that and other comments, I don’t think the RBA will wet their powder at this meeting.

The Bank of Canada (BOC) meets on Wednesday. This is a tough row to hoe for me. BOC Gov. Poloz has been pretty aloof lately. I don’t think they will want to show the divergence of the two economies as evidenced by interest rate cycles, at this time, so things should remain unchanged here.

Then on the Emerging Markets front…. The Reserve Bank of India (RBI) meets tomorrow. RBI Gov. Rajan has been the star performer in India, and has kept the economy afloat, and the rupee’s head above water. But, I think he’s going to have to cut rates at this meeting. India will still enjoy a healthy interest rate difference to the U.S., Eurozone, U.K. and Japan, but a rate cut now with all the thoughts surrounding a rate hike in the U.S. is not going to be considered to be good timing.

And then finally the Central Bank of Poland  (CBP) meets Wednesday, and they will have to decide if they want to keep rates unchanged or deal with the ECB’s imminent announcement the following day, and cut rates. I wouldn’t want to be in their shoes.

Gold and silver, platinum & palladium are all under water again this morning. Gold is basically flat, but down a buck or two at times. The downward trend for the precious metals continues, despite the continued strong demand for physical metals in Asia, and Russia. I really have nothing to say about it, other than it is what it is. And you get to decide what the “is” is.  I’ve got a long laundry list of words to describe what it “is”.  But none of them are Rated G. HA! The question that keeps popping into my head is: “At what point in the price drop of gold and the other metals do you stop thinking that the price drop means I get to buy at cheaper prices?”

So, how did you like the data report card last Wednesday? For all of you who keep score at home, I’m sure it was good to see, for all of you who think that it doesn’t matter what the data prints reveal, the Fed is going to hike rates no matter what happens with data. And that would be all fine and dandy with me, IF, the Fed Members didn’t always make a point of telling us that they are data dependent.

The U.S. Data Cupboard was empty on Friday, and today will have the Rocktober prints of Pending Home Sales, and the November regional manufacturing indexes from Dallas and Chicago.  These regional manufacturing indexes have all been very disappointing this month. I could do a report card on them, but I think I’ll save that one, and hope you trust me telling you that they have all been disappointing this month.

And tomorrow’s Data Cupboard will have the National ISM Manufacturing Index. Now for the past couple of months I’ve written here, and in the monthly letter to clients, A Review & Focus, about how this Manufacturing Index has fallen steadily every month since last August, and last month it fell to 50.1.  Now, IF we could actually use the regional manufacturing indexes as a clue as to what the National ISM will print, we would think that the National ISM would fall below 50 this month. But that NEVER HAPPENS!  For some unknown reason to me, the regionals have no say in how the National Manufacturing Index performs. So, right now, the so-called experts have the ISM rising to 50.5 in November. I’m going to go out on a limb here and say that we’ll see a dip below 50. That’s my story and I’m sticking to it!

A week or so ago, I wrote about how Ireland had accepted austerity in 2008, and now were coming out of the pain looking healthy, much to the chagrin of economist Paul Krugman, who is “anti-austerity”.  There was a good article on KITCO that detailed the whole shooting’ match, if you want to read it you can find it here.

The thing I liked best about the article was this part that finishes up the discussion about how Krugman was in favor of Abenomics (Japan’s failed economic measures) vs. Ireland’s austerity. Check this out:

But none of this dissuades Krugman from believing the only thing lacking in Abenomics is its conviction to do more of the same. Krugman selects to trust his lying eyes, preferring to pursue lost decades over a few austere years. In a column penned in 2013 he childishly blustered that, ‘The repeated invocation of Ireland as a role model has gotten to be a sick joke.’ Nevertheless.It appears this time the joke is on him.

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


Chuck Butler
for The Daily Reckoning

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