Let The Rate Discussions Begin!

Today’s Penning for your thoughts…

Good day, and a wonderful Wednesday to you!

So. The board games are all out on the table, and the two-day FOMC meeting will being today. That’s always been a long running thought of mine (for new readers that aren’t sure what I’m talking about), that the Fed’s FOMC 2-day meetings were probably filled with sounds of “You’ve sunk my Battleship” and “go directly to jail, do not pass go, do not collect $200.”

For what else was there to do in a two-day meeting, that is normally all accomplished in 1-day? It’s just for fun to explain the 2-day meeting. I really, seriously, don’t believe that they play board games, I’m not that silly-minded. And like I said yesterday, you have to inject some levity into the Fed meetings.

Now I can see some guys that looks like Randolph Duke and Mortimer Duke (in Trading Places) looking down his nose at me, and saying, “Son, financial matters are serious things, and should never be injected with laughter”…So, I apologize to anyone that I’ve offended over the years, with my silly thoughts.

Well! Now that we’ve gotten that out the way, we can move along to what is actually happening or has happened overnight!

The dollar is mixed today folks. The euro has lost some major ground once again (about 3/4’s of a cent) but the Aussie dollar (A$) is really on a tear these last few days, and again overnight through this morning, the A$ is holding the best performer of the day medal. Go ahead and place it over your head and around your neck, A$, you deserve it!

I saw yesterday, the my guitar playing friend, and investment guru extraordinaire, Steve Sjuggerud, sent out a letter talking up the A$… He pointed out that most recently the A$ was hated as a currency and that it appeared it was all overdone. The trading pattern of the last 5 days would confirm that thought, as the A$ continues to recover.

No, I don’t see the A$ getting back to the lofty $1.04 levels of last year, and I have to think that the overdone recovery doesn’t have marathon legs either.

The euro lost ground when their latest CPI data (consumer inflation) didn’t give anyone a warm and fuzzy about whether the European Central Bank (ECB) would look to add stimulus to generate more inflation. August CPI for the Eurozone was 0%…  And if you look at the number it’s pretty ugly, but not when you compare it to the July print of -0.6%!

So, inflation is actually on the rise in the Eurozone, but that big fat Goose Egg for August made everyone forget that the previous month was even worse, and the euro got caught in the mixer.  Sooner or later, someone with an ounce of brains will figure out that 0% is better than -0.6%, and wrap a tourniquet around the euro.

Remember, yesterday, when I talked about how the Japanese yen was the best overnight performer, but I said that I didn’t think that would last, because Japan is a basket case, and deserves a weak currency?

Well, it didn’t take long for those gains from the previous night to dissipate last night, after the ratings agency, S&P, announced that they had cut Japan’s long-term credit rating one level to A+.  And the S&P sounds like they read the Pfennig, because they had this to say:

We believe that the government’s economic revival strategy, dubbed Abenomics, will not be able to reverse this deterioration in the next two to three years. Economic support for Japan’s sovereign creditworthiness has continued to weaken.

UH-OH! Well, it’s about time that others outside the writer’s world recognized the basket case that’s also known as Japan. I know, I know, I’m very critical of Japan, their leaders, their plans, and their debt. Sometimes I feel like Japan is the Beaver (you know the old Leave It To Beaver show?) And I had better stop there.

The Chinese renminbi, decided that the previous night’s large gain should be reversed, and reversed it was!  Strange going on with the currency these days folks.  You used to be able to count your eggs before they were hatched when figuring what the Peoples Bank of China (PBOC) would do with the currency each night. But no longer, as the reins for the currency were supposed to be getting handed over to the markets, but like someone that has held onto to something for so long, the PBOC doesn’t seem to want to give up control just like that.

Yesterday I highlighted Jim Powell’s GCOR newsletter, and today, I’m going to borrow something else from Jim.  When he was a Boy Scout he remembers being taught that if he were ever lost and scared, that he should stay put, and make the best of the situation. And then he says, that “Doing nothing during a scary event, except make the best of it, is also excellent advice for investors.”  And then he goes on to point out the massive two-day sell-off of stocks late last month, and then the recoveries in the days to follow.

I thought about that a lot after reading it, and thought, you know, that’s what I tell people all the time about diversification with currencies and metals. Batten down the hatches, right?  You bought the currencies and metals to protect your dollar denominated investment portfolio from any downward, purchasing power declines of the dollar.  Sort of like insurance. And you don’t sell your health insurance when you don’t need it do you?

I could go on and on, but I won’t.

The price of oil has ticked higher again overnight. Monday and Tuesday, it seems to be stuck in the mud with a $44 handle. But now, oil is showing off its new $45 handle. But the rise in the price of oil just isn’t giving the petrol currencies any benefits of their association with the bubbling crude, Black Gold, Texas Tea.  And gold is up $4 this morning. Back and forth, back and forth with gold.

The U.S. 10-year Treasury yield really got goosed yesterday and added 10 BPS from 2.17% to 2.27%. I know those wild swings like that in the 10-year Treasury, really make things difficult for the boys and girls that price mortgages. You may put out a price in the morning, and have to come back and make major changes in the afternoon. Go to lunch, and you might find out that all the mortgages you priced in the morning are in the red!  But that’s what they get paid for, so don’t worry about them.

When I was the Risk Manager on the currency desk, I knew all about how wild currency intra-day swings could make my life miserable, if I wasn’t on top of things all the time. I used to miss so many corporate meetings, because, there was a key data release out soon, that could move the currencies, and things like that.  I have no idea how I got here with this discussion.

Apparently, though, the “bond boys” and I don’t want to get in trouble like the lovable Ted Drewes, the frozen custard King, did here in St. Louis, when he said “it really is good guys” and then he had to go back and re-record his line to say, “it really is good guys.. and gals”. But, the “bond boys” has been a term used long before I began my career in the markets in 1973.

But apparently, the bond boys think the cards have been played, and the Fed will hike rates tomorrow. Or, this could just be one of those 1-day blips in the yield, that makes everyone think that rates are on the rise, only to find a back door buyer of Treasuries that bring the yields back down. Someone’s knocking at the door. Open the door and let them in. I wonder who it could be at the door?

Well, one petrol currency with a gain this morning, is the beaten and beleaguered Russian ruble. The ruble’s gain this morning is a good one, so I think the traders are saying that Russia needs a higher oil price more than anyone else.  Of course I would bet you a dollar to a Krispy Kreme that Brazil, Canada, Norway, and others would argue that point.

Speaking of Canada… yesterday I gave you the news that the government will reach a surplus a year earlier than originally forecast, and the Canadian loonie is basically flat this morning, after a nice gain yesterday. Talk about a currency that was on the “hated” list, like the A$ above. The loonie is not going away folks.

You know, I’ve written so much lately about the FOMC rate decision tomorrow, and how I don’t believe the Fed will hike rates now, and if they do, it will be a HUGE mistake, in my opinion, which of course could be wrong. So, I’m tired of writing about it all. I think I’ll let it all slide now until we see the color of the FOMC’s money tomorrow afternoon. Sound good?  I think so. I have a lot on my mind these days, and need to keep focused on what’s important.

The U.S. Data Cupboard, pretty much played out like I thought it would yesterday. I did get a kick out of research paper that Barclays sent out, which said that August Retail Sales show a buoyant U.S. Consumer. Hmmm…  for those of you keeping score at home,  August Retail Sales grew only 0.2% vs. July.

0.2% growth doesn’t register with me as buoyant. It is what I said it would be from the BHI indicators; just okay. Nothing great, nothing really bad, except if you think about how in the 6th year of our supposed “recovery” that it’s all we can generate in Retail Sales. Then it’s bad, eh?

The NY Region, Empire Manufacturing remained in a funk, matching the August print of a negative -14.92% with a September negative -14.67% print.  On top of all that, Industrial Production for August was negative -0.4%, and Capacity Utilization was 77.6% down from 78% in July.

I try to explain periodically that Capacity Utilization is one of the few forward looking data prints, and in this case, when looking forward, it sure doesn’t look so bright that you have to wear shades, eh? Manufacturing Production for August was negative -0.5%, vs. a +0.9% print in July. All-in-all, not a pretty day for the Data Cupboard. And once again, I ask the question. “And the Fed is going to hike rates, because?…”

Oh, and I read last night that Hewlett Packard is going to cut 30,000 jobs . But not to worry, I heard that just that many are being hired by Toys-R-Us for the “Christmas shopping season”, which they believe will start early this year. Really? I mean Halloween candy has been in the stores since July.. UGH!

And guess what’s on the horizon that will come in focus in less than two weeks? The debt ceiling. You may recall that back in March, the debt ceiling was suspended, and the Treasury Dept. is deploying so-called “extraordinary measures” to keep the country paying the bills. Treasury Sec. Lew, said that the “extraordinary measures” would not run out before late October. But, everything I read on this stuff says it will come much sooner.

Now, we must remember that back in March, I was watching spring training baseball every day, and that when the debt ceiling deadline was suspended, that the March date was already a date that had come from an earlier debt ceiling deadline. Kicking the can down the road, right?

Well, I wouldn’t be surprised to see this done again. Let’s just keep piling up debt, that’s what we do. And it will become someone else’s problem right?  Well, my grandkids are still too young to be told about these burdens that will be placed on them, but when the time comes, who better to explain it to them than me?

And like I said above gold is up $4 this morning,  and silver has added 10-cents to its price. I talked a lot in the last year, about the building pressures in silver and how demand had outstripped the production, and if it kept up, that there would be shortages in silver, which should see an adjustment in the price.

Well, I was reminded of this yesterday, when the GATA people sent me a note that was originally written by Silver Guru, Ted Butler,  so, since they thought to send me this, and jog my memory, I might as well mention it!  Let’s listen to what Ted Butler had to say, very quickly here:

From the very beginning of my epiphany 30 years ago about a silver price manipulation on the Comex was the unavoidable conclusion that if prices were artificially depressed as I believed, then at some point a physical shortage must develop. If the price of any commodity were set too low for too long a period of time, then the dynamics of the law of supply and demand would eventually crimp supply and encourage demand to such an extent that a physical shortage must develop and end the manipulation.

Well, remember when I first talked about the financial problems that were going to begin to rear their ugly heads in the oil industry? Well, yesterday my friends over at the 5 Minute Forecast, Dave Gonigam and Addison Wiggin, had a short piece on this very thing. So, let’s listen to Dave go through this. Don’t Look Now, but here comes the $5 Trillion energy-debt tsunami Jim Rickards started warning about in January:

The oil patch is expected to finally face a financial reckoning, experts say, with carnage occurring as early as this month,” says The Wall Street Journal.

As Jim explained eight months ago, total corporate debt issuance for energy exploration between 2009-2014 works out to $5 trillion. And those loans were written on the assumption oil would stay between $80-110 instead of trading as it is this morning [checking our screens] below $45.

The Journal says smaller drillers may see their credit lines cut only weeks from now. It cites a recent analysis from Citi: “With eight bankruptcies already announced this year, weaker producers could live or die by the whims of capital providers.”

That’s a best-case scenario. The paper doesn’t entertain the worst case that Jim described in January — default rates of 10%, and that’s a conservative assumption

Chuck again.  You know, I realize that I do this all the time. I see things that are going to happen. They are evident, but not imminent, and by the time they are imminent, everyone has forgotten I pointed them out long ago… I wish I had kept a scorecard all those years ago.

Then I could do one of those awfully-long videos where I can talk about all my successful calls, and of course leave out the unsuccessful ones, and then tell people why they should listen to me. Nahhhh. I wouldn’t do that! I totally dislike those things!

That’s it for today. I hope you have a Wonderful Wednesday!

Regards,

Chuck Butler
for The Daily Reckoning

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