New BREXIT Poll, Excites Risk Assets

And now… today’s Pfennig for your thoughts…

Good day, and a marvelous Monday to you!

Well, well, what have we here this morning? A “Risk On” day? Why yes, indeed, that is exactly what it appears to be to me, with stocks overseas going hog wild overnight, the U.S. Futures set for a strong U.S. opening, and currencies all having their way with the dollar. U.S. Treasury yields are rising again (but for how long before the invisible hand turns them around this time?), and the only asset not moving in the direction that seems appropriate this morning is gold, which is down $8 in early morning trading.

What has everybody doing the hokey-pokey this morning? Well, it appears that a poll taken in the U.K. over the weekend, showed a reversal of the positions between “don’t leave” and “leave”. For those of you new to class, in the U.K. they are having a referendum to see if the people want Britain to leave the European Union/EU, or stay. They call this situation ” BREXIT” So, the latest poll shows the “don’t leave” vote at 45%, and the “leave” vote at 42%… and THAT’s what has the risk assets all gussied up and dancing in the streets this morning.

And pound sterling is the best performer overnight, with Japanese yen coming in a close second. These two debt ridden old, stuck in the mud economies, both having the best performing currencies overnight. Who’da thunk it? Not me! But then ever since the financial meltdown we haven’t been trading currencies on fundamentals, but more sentiment, and I don’t get that. I really don’t! Sentiment is something that allows emotion to creep in, and that’s why when currencies and metals or any investment asset for that matter, trades on fundamentals, everyone can see them, make intelligent decisions about what to buy and own, and sleep well at night.

The other BIG NEWS overnight came from India, where Reserve Bank of India (RBI) Gov. Rajan turned in his notice to not seek another term as Gov. This move shocked the markets, and the Chicken Littles were coming out, until calmer heads prevailed and things got a little better, as the markets had a V-8 head slap and realized that Rajan leaves India in a far better position that it was when he took over.

Rajan did note in his resignation letter that he “lacked the support of government” Hmmm… that whole Indian economy is a mystery as to how to unlock it and set it free, and I sure thought that the combination of PM Modi, and RBI Gov. Rajan would find the key to unlocking the economy. I have to wonder now if that will ever happen, for to me, this was the best chance with these two leaders.

And like gold being the odd asset that’s not rallying today, so too is the Indian rupee, as the markets are still reeling, from the Rajan news.

News this weekend from China was Interesting. Reuters reported that China has ordered at least 255 Shanghai-based industrial facilities to fully or partially shut down for 14 days. They are doing this in order to reduce pollution ahead of the G20 Hangzhou Summit that’s scheduled for Sept 4-5. So, August Industrial production is going to take a hit, you can be assured of that, and we need to keep that in mind, but more importantly, the markets need to keep it mind come the Sept. print of August Industrial Production.

There’s not much going on other than what we’ve just talked about. The Data Cupboard is bare today and tomorrow, with only a Janet Yellen speech scheduled tomorrow. Speaking of Janet Yellen… I was thinking about this the other day, and started jotting down some notes so I would remember them today. I think there’s a HUGE difference between hope, and knowing.

When you “hope” something will happen, you do not talk and sound like you know it’s going to happen! Unfortunately, for the gyrations in the markets, the Fed members apparently don’t know the difference! Because they kept telling us the economy was going to take off, inflation was going to rise, and they would be hiking rates four times in 2016. What they should have been saying is that, “We HOPE the economy will take off, but as of yet it doesn’t show signs of doing so, and we HOPE inflation will rise, and we HOPE to get the opportunity to hike rates four times in 2016″.

Now had they said it that way, the dollar would have not been so strong the last six months, and gold would be knocking on the door to $1,500, but that’s just me talking, I don’t have any facts to back that up, so I guess I should tear a page out of my own book, and say. “Now had they said it that way, maybe the dollar would not have been so strong the last six months, and maybe gold would have pushed much higher.” There! That ought to make everyone happy with me!

I prefer the brash, off the cuff, shoot from the hip, that’s not afraid to call a dolt and dolt, Chuck, but the kinder, gentler me had to take hold, or else you wouldn’t be reading this letter from me! Oh! And the Janet Yellen speech tomorrow is not really a speech per se. She will make her semi-annual trek to lawmakers to give her assessment of the economy, and then repeat it for the House tomorrow. This is the old Humphrey-Hawkins bill, but that bill expired a long time ago, and the Fed Chairs, Big Al, Big Ben, and Janet have kept it going. And for that we thank them.

Well, as I told you above, gold is down $8 in the early morning trading. This is just an unwinding of buys that were made when the BREXIT appeared to be winning in the polls. I don’t think it’s anything more than that. Gold has reached a three-year high last Friday, but has since backed off. I was reading about gold at some time this past weekend, and came across a couple of quotes that I think are very good. You be the judge!

Two quotes by famous men that you probably have heard of regarding gold:

Betting against gold is the same as betting on government – He who bets on governments and government money bets against 6000 years of recorded history Charles De Gaulle

You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold. – George Bernard Shaw

And as far as the U.S. Data Cupboard is concerned, we’ll have to wait until Friday, before we see something that makes a difference, when Durable Goods and Capital Goods Orders will print. Thursday will have a flash PMI (manufacturing index) but it’s not the real ISM report so the markets don’t pay that much attention to it.

I gave you a lot of stuff last week on debt, and the bad running economy. And I came across this piece of information that plays well with all that talk last week. Read this now, and then stop and let it sink in, and then tell me that the dollar should be so strong, or that gold so cheap. After World War Two, America boasted forty percent of global economic activity. Thirty years later that world domineering number had fallen to 23 per cent and last year was just sixteen per cent of world output.

Longtime readers know that I’m a BIG fan of history, and how we revisit history all the time. And so the title of this article on Bloomberg was for sure to catch my attention: The title: “The World Economy Looks A Bit Like The 1930′s”. Here’s the link to the full article, or here’s your snippet:

To understand today’s global economy, look back 80 years.

Just like in the 1930s, growth is being constrained by companies unwilling to spend, falling inflation expectations and governments backing away from fiscal stimulus.

The trigger for the current malaise was the financial crisis that left a hangover of debt and deleveraging amid tighter banking regulations that are exacerbating deflationary pressures. It’s similar to the kind of shock that preceded the 1930s slump, according to an analysis by Morgan Stanley economists led by Hong Kong-based Chetan Ahya.

‘We think that the current macroeconomic environment has a number of significant similarities with the 1930s, and the experiences then are particularly relevant for today,’ they wrote. ‘The critical similarity between the 1930s and the 2008 cycle is that the financial shock and the relatively high levels of indebtedness changed the risk attitudes of the private sector and triggered them to repair their balance sheets.’

Chuck again. But you dear readers all know because I’ve told you this at least a dozen times in the past, that the difference between then and now is that there are no soup lines like in the 30′s, because these days, we mail the check or debit card to the person needing assistance. That way, all the people needing assistance stay out of the evening news, and the rest of the country has no idea how many people really need assistance.

That’s it for today. I hope you have a marvelous Monday, and be good to yourself!


Chuck Butler
for The Daily Pfennig

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