Russia & Saudi Arabia Agree To "Freeze" Oil Production Levels

And now… today’s Pfennig for your thoughts…

Good day, and A Tom terrific Tuesday to you!

Risk in general is great topic to spend some time thinking about. We know from studies and observations that humans are terrible at assessing risk. Security expert Bruce Schneier has commented extensively on risk (since that’s his business) and has a number of excellent books including “Liars and Outliers”.  As investors and market participants we all fail in some way to truly understand risk  in a compressive way. That conversation with an investment representative of some sort years ago – so how much risk do you think you can accept?  Down 20%?  Down 30%? Down 50%? – feels abstract as the discussion progresses.  But when the market tanks like 2008 or even the start of this year and dollars are thrown up next to the percentages we can all feel a little sick.

But risk is all around us and has to figure in to investment – and most other – decisions. What should we be thinking with the current market?  Buy more since that asset we liked is a lot cheaper? Or as Royal Bank of Scotland said near the top of the year – sell everything but high quality bonds. Yikes.

Here’s what’s happened since last Friday. Something that I’ve been talking about as a “might be happening” actually happened! Russia and Saudi Arabia met in Qatar, and agreed to “freeze output levels”. Recall that the thoughts were that these two major oil producers would meet to discuss production cuts. Well, they didn’t cut production, they “froze it” instead, which I really don’t think is going to be the cure that ails the price of oil, at least right away.

I would think that the oil traders will wait and watch to see if the “freeze” really, truly holds, or if a “thaw” comes quickly. I do agree that if the “freeze” holds, that it provides a better foundation for the price of oil as the year goes on. History tells us that the oil producers cheat, on production numbers, quotas, limits, etc.

It’s a catch-22 for Russia. Maybe the price of oil recovers as we go along, but Russia agreed to freeze production levels, so does the “freeze” really help Russia after all?  Russian ruble traders don’t think so, and have gone about whacking the ruble this morning, after initially buying the currency.

The other Petrol Currencies are seeing some love this morning from the “freeze” announcement. Oh, and to set the record straight, Venezuela, and Qatar also agreed to “freeze their Oil production”, which I think hurts the agreement’s ability to remain viable. the more oil producing countries involved the greater the risk of a “cheater” coming forward.

The Japanese yen has given back some of its lofty gains of last week, but still remains stronger than it was two weeks ago, based on the flight of investors to the so-called “safe havens”.  I have something on Japan and the Bank of Japan in the FWIW section today, so you won’t want to miss that! But before that, I wanted to talk about how having yen as a part of the so-called “safe havens” just shows how ridiculous that “title” is. And the only thing I can put it down to is “muscle memory” and when things get tight, traders buy yen. Now that’s a “muscle memory” I think it would behoove traders to forget about, and quick!

I just put the finishing touches on the March Review & Focus, I know, early, right? But it is what it is, and what I wanted to say is that in the R&F I talk about this “muscle memory” thing a little more, and have some real interesting items for March. The R&F no longer gets printed and mailed out. The printing came to an end, but every new beginning comes from some other beginning’s end.

The Aussie dollar (A$) is up a bit this morning, while the New Zealand dollar/kiwi, is down 1/2-cent. It always causes me to do a double take at the currency screen when this happens, because normally these two move in tandem, or trade off in sympathy with the other. Kiwi is getting sold this morning, not for a bang on expectations of Retail Sales (up 1.2% Month on month), but more for a report that highlights the inflation expectations, which has inflation falling to 1.63% from 1.85% in the previous report. This is the lowest level in over 20 years! But. But. But… it’s just an expectation, let’s not get our pants pulled up too tight here.

The Chinese finally came back from their week-long holiday celebration, and the first thing they did was weaken the renminbi at the fixing. The Chinese printed some loan data this weekend that showed a HUGE expansion of credit, but, those numbers were skewered by the intervention that the Chinese were doing in the markets.

I read a report this weekend that talked about how the Chinese may have interjected up to 1.5 Trillion RMB in January! WOW! That’s HUGE folks! And scares the bejeebers out of me, in that it won’t take China long to go through their treasure chest of reserves at this pace. Of course there’s nothing that says the Chinese will continue to interject RMB at this pace.

Gold is up a couple of bucks this morning, no biggie, right now. But, boy were the writers all jumping back on gold’s bandwagon this past weekend. I read report after report of how this guy, or that girl, believes that gold has turned the corner and it’s time to buy gold again. Really?  Wasn’t the time to buy gold before it gained more than $100? I had a conference call with Chris and Joseph Stolzer on Friday, and Chris and I were chuckling because of this newfound love of gold, after it has moved more than $100 higher. Typical I guess, but why?

Overall, there’s a general feeling in the markets this morning, that there’s less of a need for the safe havens.  The 10-year Treasury’s yield has risen from a low of 1.63% last week, to 1.75% this morning, and Japanese yen has given back two whole figures, which the euro struggles to keep its head above water, and francs seem to stuck to the euro’s side lately. But gold has held above $1,200, and is adding on to its level this morning, so not all safe havens are seeing selling.

The US. Data Cupboard is pretty much dominated by second Tier data this week, with only the Industrial production and Capacity Utilization prints and the Fed’s meeting minutes print being the only “real data” for us to see this week. Sure the stupid CPI will print on Friday, but I wouldn’t even put that in the category of a second Tier data report!

Friday’s U.S. Data Cupboard has the January Retail Sales report that we had waited all week for, and the BHI had told us that it would be disappointing. Well, it was failing to gain on the revised 0.2% in December. Oh my! No growth in Retail Sales. no growth in Personal Spending. And Janet Yellen had the brazen attitude to blame the U.S.’s problems on overseas market turmoil?

Before we head to the Big Finish today, I have this for you. I keep talking about the how the credit expansion needs to keep going. I told you last week that three of the five largest economies in the world had seen their credit expansions “roll over” (end) with only China and the U.S. still expanding. The financial world since 1971 has seen the credit expansion as the #1 reason for economic growth, and the life we know today. So, what would end the credit expansion in the U.S.? Well, how about a collapse of the economy? 

Now, I’m not here saying that we’re going to see a collapse in the U.S. economy, but what I am here to tell you is simply that things aren’t looking very good here at home.  The “real economic data” that I talk to you about has gone to the dogs. And now there’s this little ditty that I came across while reading my fave writer/analyst, Grant Williams, and his letter: Things That Make You Go Hmmm. Grant tells his readers that, “2015 was a bad year for hedge funds. Hedge Fund Research reported that the average fund fell 3.64% and, amazing, Q3 alone saw over 250 funds call time (after 200 had one the same thing in Q2)”

Is anyone watching stuff happening? Or is just me, and I’m the boy who cried wolf?

Longtime readers know my dislike of Central Bankers, the Central Planners of the world. I’m one of the few, the proud, that believe that the economies of the world would be far better off with Central Banks that didn’t have mandates, didn’t have agendas, and were simply there to regulate the banks, and monitor money supply.  I’m a firm believer that they (Central Banks) have lost control of the financial system, with all their QE, ZIRP, Easy Credit, and outright misleading comments about the state of the economy. And now, they’re resorting to rambling.

Last week, the Bank of Japan (BOJ)  went negative with their deposit rates, and their bond yields soon followed.  And then I learned that BOJ Gov. Kuroda has quoting Peter Pan, when he said, “I trust that many of you are familiar with the story of Peter Pan, in which it says the moment you doubt whether you can fly, you cease forever to be able to do it”  and then went on to say, “Yes, what we need is a positive attitude and conviction. Indeed, each time central banks have been confronted with a wide range of problems, they have overcome the problems of conceiving new solutions.”

So, are we to believe that if we stop believing that Central Banks can conceive new solutions, that we will be unable to believe that forever more? Well, count me as one person that not only no longer believes it, but never believed it!  So, since Kuroda brought up Peter Pan, let’s play along, and do the opposite on the “I believe, I believe” stuff, with “I don’t believe, I don’t believe”

And  before I end this, let me say that these days Central Banks believe they are responsible for the financial markets. That’s right, they want to “stabilize the markets” but is that really what they should be doing? NO! First it was just price stability (inflation), then they added employment, and now they want to add market stabilization?  Give me a break!

That’s it for today. I hope you have a Tom terrific Tuesday!


Chuck Butler
for The Daily Pfennig

P.S. Be sure to sign up for The Daily Reckoning — a free and entertaining look at the world of finance and politics. The articles you find here on our website are only a snippet of what you receive in The Daily Reckoning email edition. Click here now to sign up for FREE to see what you’re missing.

The Daily Reckoning