The Dollar Has The Conn.

Today’s Pfennigfor your thoughts…

Good day, and a marvelous Monday to you.

Well, there are no shockwaves going through the currencies this morning, so that’s a good thing. China sure did throw a Big Fat Cat among the pigeons last week and sent shockwaves around the world.

But in the end, it was a simple case of a country devaluing their currency less than 5%, in three moves. I sent the September R&F to press late last week, and in it I wrote about how the less than 5% devaluation was less than previous devaluations in like Japan, and Malaysia. So, just to put it into perspective…

I look at the devaluations differently than most people in the markets. I see it as a problem for global growth.

Obviously, there is none. Not here, not in Europe, not in Asia or Pan-Asia. In fact the only country that’s still proud of their economic growth is India. The U.S. thinks they are proud of their growth, but if they really sat down and took a proper account, they wouldn’t be so cocky.

So, that’s why I believe we could see more devaluations going forward from just about every country on the planet. I don’t believe they’ll succeed in reviving their economies this way, because, like I said last week, when every country is doing the same thing,  no one wins.

And I used to think that the folks that run the European Central Bank (ECB) were prudent, and smart.

Wim Duisenberg, the ECB’s first President, probably needs to find a trash can to vomit in every time he hears current ECB President, Draghi, talk about Quantitative Easing (QE), which by the way for all of you keeping score at home, isn’t doing anything to rev up the Eurozone economy, it’s still moving at the same slow pace it was before they implemented QE!

Al-righty then. I got those two thoughts off my chest. Whew! That feels better!

Well, the currencies are down but not by large margins this morning. The price of oil has dropped again, this time to a $42 handle. I read this weekend, that our friends (NOT!) at OPEC have been pumping more oil than they’re telling the world. And this could very well keep the pressure on the price of oil to fall further.

This was an interesting report on OPEC, and I have to say that it doesn’t surprise me one iota, that these guys would open the oil spigots. It’s still thought around the world that Saudi Arabia has spearheaded this move by OPEC, and did so to put the hurt on the U.S. shale producers.

Apparently, Saudi Arabia didn’t like the fact that the U.S. was becoming energy independent.

The euro has dropped below the 1.11 figure it held throughout last week, but the fall was like going down one small step, so maybe as the day goes on, the single unit can recover that small step down, and get back to 1.11.

So, everyone now is in agreement on the bailout/aid package for Greece. The Greek Parliament approved it last week, and then the European leaders approved it. So we can finally put that to bed!

Now the talk going around is that the Eurozone leaders would like to see the IMF involved in the aid package to Greece. I had to chuckle a bit when I read that, because the IMF has a history, and a very near history, with loans to Greece that don’t get paid back on time! And without new aid, they would have never been paid back!

So, for once in a Blue Moon, I’m in agreement with the IMF on this one. Once bitten, twice shy, babe.

The currency screens don’t look too nice this morning. As I said above, for the most part, the currencies are down, with the Chinese renminbi, and gold the only outliers. That marks the last two session that the Chinese renminbi was allowed to appreciate.

I saw that this past weekend, the China Securities Regulatory Commission (CSRC) said that they wanted to allow the markets to “self-adjust”.

Hmmm… sounds pretty capitalistic to me!

Here’s the CSRC had to say:

With market fluctuations gradually shifting to normal, from wild, and abnormal, we should let the market exercise its function of self-adjustment.

WOW!  When was the last time you heard something like that? Anywhere?

I asked the question last week, and only received one or two responses — do you think the Chinese devaluations last week will be used as an excuse by the Fed to not hike rates next month? I do. But then I’ve said all along that I don’t believe the Fed will hike rates in 2015.

I guess now that the Chinese sent those shockwaves through the planet last week, there have been quite a few more economists and observers thinking that this was a nail in the coffin of a rate hike.

But the rate hike bugs are still running all over the place and they have the conn right now, which means the dollar still has the conn. You know as longtime readers that I went out on that big fat limb (so it will hold me!) some time ago, and said that when the Fed bypasses their rate hikes, they will lose some credibility with the markets, and that could damage the dollar.

But, now that the Fed has this excuse — like the dog ate my homework, the sun was in my eyes, I tripped on rock — and China devalued their currency, they can avoid losing that credibility.

The IMM futures from last week saw dollar long positions soar, while the short positions of Japanese yen, Swiss francs, and few other currencies were added too.

Just a few weeks ago, the dollar long positions were dropping like the batting averages of hitters facing Chris Sale, but now that’s all forgotten, and the long dollar positions are on the rise again.

This week, we’ll see the Fed’s FOMC Meeting Minutes from their last meeting, print. The markets will go all gaga over them, to see if there are any hints as to what the Fed might do in September.

Memo to markets: REMEMBER! These minutes were from a meeting that took place last month, and way-before the Chinese devaluation.

Last week it was a case of the New Zealand dollar/kiwi getting sold, while the Aussie dollar (A$) gained some lost ground back. They’ve switched places to start this week, sort of. Kiwi is not recovering but it’s also not losing, as it’s flat on the day.

These two currencies are always out in front of any global growth, but with no global growth where are they to go? Well, I think you’re seeing it; nowhere.

The U.S. Data Cupboard  was busy last Friday, with a good report on Durable Goods (first one in what seems like a month of Sundays) and a not so good Capacity Utilization report, PPI (wholesale inflation), and U. of Michigan Sentiment for this month.

So, let’s go through these.

First Durable Goods were up 0.6%, which is much better than what’s been printing in recent months, there was a unforeseen surge in motor vehicle production in July, which fueled the rise. But here’s the thing that bothers me from Friday’s data: Capacity Utilization (CapU) just can’t seem to gain any real traction, as the previous month’s data was revised downward from 78.4% to 77.7%.

July’s print was 78%, but it will most-likely be revised downward too. CapU is one of the few forward looking pieces of data, and this data is moving in reverse.  PPI is stupid, so let’s skip to the U. of Michigan Sentiment Index which fell this month to 92.9 from July’s 93.1.

So, those surveyed were not so confident about what’s going on. Hmmm…

Well, I told you above that gold was positive this morning, but right now, it’s only got a $1.75 gain, so basically it’s flat this morning.

I read this weekend that contract talks with S. African mine workers have collapsed, if we see a strike here, we could see a delay in production, which could give gold a short-term blip up. But that remains to be seen.

Oh, and in an attempt to be more “open” about their gold holdings, China reported that they bought 19 tonnes of physical gold last month. Again, I believe China is still holding back on their actual holdings, but is reporting something to the IMF on a monthly basis now, which should be good theater.

Well, you know my stance on the U.S. economy, and I’m always fighting with those that believe we’re on the golden brick road to Oz.

So, a longtime reader knew I would be salivating on the news that was on last Friday. And he was right!  This will be short-n-probably not so sweet, and the only thing missing from the piece on is a graph, illustrating the data.  So, here we go:

Total business inventories for June rose 0.8% MoM – the biggest rise since Jan 2013.

Great news for Q2 GDP as we stacked ’em high, but as sales lagged dramatically, the inventory-to-sales ratio hit a new post-crisis high at 1.37, flashing a very recessionary level going forward (dampening hype hope for Q3 GDP).

Once again it was autos that saw the biggest relative jump in inventories (+1.4% MoM) relative to sales (-1.5%).

Inventories exploded in June…

Chuck again.  Yes, this is scary data. And one thing the report doesn’t do is tell you that the last time Business Inventories to Sales were this bad, was 2008.  Now that makes it all a little more scary, doesn’t it?

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


Chuck Butler
for The Daily Reckoning

P.S. The Daily Pfennig is first published everyday, right here.

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