Man, Markets & Manias, Part I

We had an insightful conversation with our friend, Chuck Butler, of Daily Pfennig fame last Friday. Today, we publish the first part for your reading pleasure. The second comes tomorrow.

If you’re not familiar with him, Chuck is one of the longer-running voices in these reckonings. In addition to writing the Daily Pfennig, he’s the managing director of EverBank’s Global Markets Group. Chuck knows of which he speaks.

“For 16 years,” wrote our founder Addison Wiggin last year, “while variously writing The Daily Reckoning and The 5 Min. Forecast, Chuck’s daily missives have been one of my first reads of the day.”

“Rummaging through the Data Cupboard with Chuck, digesting key insights he’s picked up from across the wire and gleaning trading room secrets in the currency markets has helped set my own daily issues on track more times than I can count. Even his enthusiasm for St. Louis is infectious. I’ve almost become a fan of the Cardinals, and I don’t even follow baseball.”

Over the phone, Chuck and I shine a light on man, markets, manias and their impact on your wealth today. Our full conversation is below and we think you’ll find it worth your time. Read on…

A conversation between Chuck Butler and Brian Maher

Brian Maher: Morning, Chuck. And welcome back to The Daily Reckoning.

It’s an honor to finally speak with you live. I read the Daily Pfennig every morning — I consider it essential reading for any investor and I heartily recommend it to all DR readers. In the interest of full disclosure, I should mention that we have a paid marketing relationship with EverBank. And happy to have it, too. We believe in their products. With that caveat out of the way, let’s get started. Welcome again, Chuck.

Chuck Butler: Thank you, Brian, I also read your stuff all the time.

Brian Maher: We’ve had a lot of new readers join The Daily Reckoning in the past year. So, let’s start with some background for anyone who may not know you. In addition to penning the Daily Pfennig, you’re the managing director of EverBank’s Global Markets.

You’ve also been one of our longer-running “characters” in these reckonings. You go a long way back with Daily Reckoning founders, Addison Wiggin and Bill Bonner. How did you begin your relationship with the DR?

Chuck Butler: Well, actually, it’s kind of funny. EverBank’s former marketing person was David Galland. And David and Bill Bonner were very good friends from way back.

And, Frank Trotter, my boss, knew Bill, too. But I had never met Bill or Addison. We were at the New Orleans Investment Conference. This is around 2003.

I had walked away from our booth for a minute. When I came back, my colleague said, “Hey, there was a guy here by the name of Addison Wiggin who wants to talk to you. He’s right over there.”

So I walked over there and introduced myself to him, and it turned out he’d been reading the Pfennig all the time.

I’d been reading The Daily Reckoning too [laughs] you know and we just started kind of hitting it off and talking about our newsletters. Incidentally, Addison told me that whenever he hired new writers, he’d put them in a room and give them a week’s worth of Daily Pfennig to read and tell them that’s how he wanted them to write. I was flattered by that.

I also met Bill Bonner at the conference. That’s basically how I met them at the New Orleans Investment Conference. We had been reading each other’s stuff but we had never met each other.

Brian Maher: Well, you’re definitely one of the livelier reads out there. The Daily Pfennig is not only informative, it’s massively entertaining. OK, your time is valuable, Chuck, so let’s get down to it.

Your analysis is always fascinating. Can you tell our readers what you think will be the biggest market story over the next, say, six months? Not right now, or next week, but six months.

Chuck Butler: Well, you know, I think, last year I did an interview with Peter (Coyne) and I said that I thought the U.S. economy was heading towards a recession. But obviously, that didn’t happen. Although, I’d say, we’re teetering, aren’t we?

I still think we’re going into a recession. It’s just been too many years since we’ve had one, and nothing that I see shows we have any type of sustainable economic growth. And that’s the kind of growth that strong economies are built on.

So therefore, I think we will head back into a recession. Then the Fed will stop with their talk of interest rate hikes and begin to cut again. And that’s going to change a lot of things in the market.

Brian Maher: You say we’re heading into recession. A lot of people would say we’re already in recession, even though it’s not official.

Chuck Butler: Yes, I think we are. I was talking about an actual, official recession, usually defined as two consecutive quarters of negative GDP growth. But I think when you only have .07% growth, that’s pretty much a recession to me.

Brian Maher: And didn’t the IMF just downgrade U.S. growth estimates from 2.6% to 2.4% for the year? It seems like they’re always revising their forecast downward. Who knows what it’ll be next?

Chuck Butler: Yeah, it’s funny how they do that, isn’t it? Every year they come out and they have these rosy predictions about how the years going to go, and they project all this growth.

And then as the year goes by, they always seem to cut them under the cover of darkness, so that people don’t see it. That seems to be the call to order almost every year now since 2009, that this is going to be the year that we come out of it. And then by June everybody’s realized that it’s not going to be the year that we come out of it. Rinse, repeat.

Brian Maher: Since the end of WWII, there’s been a recession I think every six or seven years, on average. So we’re more or less due for a real one if history is a guide, no?

Chuck Butler: Yes, we’re due.

Brian Maher: So the latest unemployment report doesn’t exactly inspire you with confidence, does it? Unemployment held at 5% last month, officially, but overall hiring slowed.

Chuck Butler: No, and the thing about the unemployment report it’s just too ambiguous. They take a survey, then the number crunchers make these adjustments to the data. So you don’t really ever really know what the labor picture is if you use the BLS report. But if you look at the labor conditions market index, which doesn’t have any “hedonic” adjustments to it, the actual unemployment number has been down for four consecutive months.

I just don’t get the BLS reasoning. And so the whole BLS report is just something I just wish I didn’t even have to deal with.

The way they manipulate numbers is just amazing. If you read David Stockman, he’s always hammering them about that. It’s almost a daily occurrence on the Contra Corner Blog. It’s entertaining. But it’s not exactly a rosy picture.

Brian Maher: That’s for sure. Let’s switch gears a bit, Chuck. What do you think about the whole Brexit scenario, with Britain threatening to leave the EU. I think the referendum is June 23rd. Do you place much stock in it?

Chuck Butler: Well, there’s a lot of words being thrown back and forth about Brexit. And boy, they like to take polls over there in Europe. They do one just about every week. But I don’t think that the U.K. will leave the European Union.

I think they see that the benefits of staying far outweigh the non-benefits, which are having to deal with the refugee problems and Greek debt, for example. But the benefits of belonging to the EU far outweigh those things, and I think they’ll stay put.

It reminds me of the whole Grexit scenario. Greece was never going to leave. What a lot of people don’t understand is that with Greece, the changes that would have to be made in every retailer’s system to accommodate drachmas instead of euros, would bring the country to it’s knees.

There’s a whole laundry list of things that would have to take place if Greece left the European Union, or left the euro. I knew from the moment that they first started talking about it that, that wasn’t going to happen.

But to sum it up, no, I don’t think Britain will leave the EU, either.

Brian Maher: As a currency expert, Chuck, how do you think that’s going to affect the pound? I imagine a decision to stay should calm the markets and give it a boost.

Chuck Butler: The pound sterling has taken some hits because of the polls and the talk about Brexit, but yes, I think the referendum at the end of June will put that talk to bed. And you won’t hear about it anymore.

Brian Maher: So the pound could be a pretty good bet over the next few months?

Chuck Butler: It could be, based on the selling that’s taken place due to Brexit fears. But you have to remember that the U.K. economy isn’t doing too well, either. So it’s not like the Bank of England is going to start hiking interest rates and generating a lot of interest in the currency that way. But it could see some reversal of the recent selling, which would boost the pound.

Brian Maher: OK, moving on from Brexit. There’s a lot of talk lately about the Shanghai Accord, where the world’s monetary honchos agreed to weaken the yuan through the backdoor, so China wouldn’t devalue its currency. It would weaken the dollar, while strengthening the yen and the euro.

Jim Rickards has written a lot about it. Some people don’t agree that it even exists, that it’s just a conspiracy theory. What’s your take? How much credence do you lend it?

Chuck Butler: Well, I think there probably was one, but when I write, my legal people always make me say the “so-called Shanghai Accord.” And there’s no real proof that there is one, you know.

But to me, there had to be something that was done. Just look at the third week of February when the G20 met, and look at the performance of the euro and the yen and the Chinese renminbi versus the dollar since that time. It’s been like night and day.

So something must have happened. It just makes sense to me that an agreement between those countries was made to weaken the dollar a bit, just to give some relief to China, which was teetering on a major crisis. 

I’m not a coincidental type person. I understand they exist, but sometimes when you’re talking about governments and markets, I don’t think there’s anything as coincidences there.

Brian Maher: So it was basically done to avoid another surprise devaluation by the Chinese essentially, because in August and January they surprised the markets with devaluations. The markets tanked. So, it’s all to avoid a replay of those scenarios.

Chuck Butler: That is absolutely correct. The U.S. had to have seen that China was ready to devalue again.

Brian Maher: Jim Rickards thinks the weaker dollar scenario will play out over the next few years. But we like to give our readers differing perspectives. How long do you see this playing out, the weak dollar and yuan, versus the stronger yen and euro?

Chuck Butler: Actually I think it’s already starting to fade.

Brian Maher: Already? That didn’t take long.

Chuck Butler: No, it didn’t take long, but we saw the yen rally a little bit. We saw the daily appreciations of the Chinese renminbi stop, and the euro has been hung up between 113 and 114 for the last couple of weeks. So it just seems like it’s kind of faded now.

Brian Maher: I guess we’ll have to wait and see how it plays out going forward. These sorts of things can zig-zag instead of traveling in a straight line. But in the final analysis, there’s only so much the monetary authorities can do to manipulate these currency markets, right?

Chuck Butler: Well exactly, like I’ve always told my readers, the markets have far deeper pockets than any central bank. If markets decide they want to take a currency somewhere, they’re going to do it and the central bank can stem those moves with intervention. But eventually they’re going to run out of money.

Brian Maher: So you think we’re getting near that point?

Chuck Butler: I think so, I think so. But here’s the thing: I think the dollar was, and still is, overvalued. And I think that once this settles down a bit, which I think it’s getting ready to do, then the markets will take a strong hard look at whether or not the dollar is still overvalued or not.

And if they think it is, then we could see more dollar weakness. I for one think that the dollar has been in a strong trend for five years now, and it’s pretty much run it’s course in that direction. It could be nearing the end of that trend.

But during the end of that strong trend you can find periods of dollar strength. It’s like it’s the dollar’s last gasp holding onto strength. This could be one of those times.

It used to be fundamentals that drove currencies. If one country had higher interest rates than the other, then their currency was better off than the other currency, and so forth.

But nowadays, what drives currencies is market sentiment. Interest rate differentials don’t really mean too much to the markets. If they did, the Russian ruble and the Brazilian real would be the strongest currencies on earth. But they’re not.

Brian Maher: That’s for sure. You’re a currency expert, Chuck. Gun to your head, what currency do you think is going to do well over the next six months?

Chuck Butler: Well, I think it all depends on whether or not the dollar is going to continue to lose its grip on its strong trend. If it does, watch for the offset currency to the dollar, the euro.

The euro has proven over the years that there can be recessions in Germany and everywhere else in the eurozone. But the euro’s going to rally when the dollar is weakening, because it’s the offset currency to the dollar.

Fundamentals in Europe are not good. They’re still teetering on recession, but they are seeing some growth. But that won’t really make a difference if the dollar is going to tail off. If the dollar is going to lose its strong trend, then the euro is going to be the main beneficiary. And that would be where I would look.

Now, a lot of customers that tell me they never liked the idea of a single currency for all these different countries. Well, to them I’d say there are currencies that I call euro alternatives, like the Norwegian krone, the Swedish krona and even the Swiss franc. So if the euro’s going to strengthen, those currencies are also going to strengthen. You could either go with the euro or one of those currencies if you don’t like the euro.

Brian Maher: Of course the consensus pick this year said the dollar would remain strong and the euro would weaken. But we all know what happens to consensus estimates, don’t we?

Chuck Butler: Yeah, and already Goldman has had to back out of their forecast. They told their clients to short euros, to short yen, and short gold. And they’ve had to back out of all three of those.

Tomorrow, we’ll return with part II of our conversation. We’ll get into gold, the elites’ plan for a cashless society, the future of the petrodollar and more. Tune in tomorrow.


Brian Maher
Managing editor, The Daily Reckoning

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