The Rout Of The Russian Ruble Continues

And now… today’s Pfennig for your thoughts…

Good day, and a tub thumpin’ Thursday to you!

Front and center this morning, the Russian ruble is getting whacked badly, and right now is trading lower in value than it ever did during the 2014 rout on the currency.  YIKES! This is getting really ugly folks, and one has to wonder where it ends, a short squeeze, Central Bank Intervention, or something like that to wrap a tourniquet around the bleeding.

But absent any of that, the currency traders are making the ruble pay for being so tied to the price of oil, which actually fell to $26.75 yesterday, but has bounced back to $28.11 as I write. This rout on the ruble has gotten completely away from fundamentals, folks. So, some semblance of reality has to come into focus here at some point.

Other than the ruble, the rest of the currencies are basically flat, or trading with a small bias to buy. The trading ranges are tiny, and it looks like a day when everyone is waiting for something to happen before they move.  The Chinese announced that they were taking a firehose to their markets and spraying an injection of cash. And then the Chinese announced that the renminbi would be fixed at a lower level once again. That’s sending mixed messages folks, and I have to wonder if the Chinese meant to do that, or did they just have a “learning moment?”

Wrong! BUZZZZ, thank you for playing, Chuck, there’s a nice parting gift for you at the door! The Bank of Canada (BOC) decided to leave rates unchanged yesterday, at 0.5%. Recall, I told you that it was a 50/50 call on whether they would cut rates or not, and I opted for the “will cut rates stance” only to be proved incorrect. UGH! But good for the BOC and its Gov. Stephen Poloz, who I had not given any credit to for maintaining price stability.

But I have to add here that there’s no way that Poloz and the BOC can maintain their stance if the price of oil continues to fall. But really, having said that, I just realized that we’re talking about 50 Basis Points of interest to cut, unless the BOC opts for negative rates, which I wouldn’t put past any central bank at this point. I’ve long told you that once interest rates get so low, like 50 Basis Points, it really does no good to cut them further, for the effect on the economy will be nascent at best.

Moving South into Mexico. The Mexican peso has really gotten whacked along with its fellow Petrol Currencies.  The peso now trades with an 18 handle. That’s very weak folks, and I wouldn’t put it past the Mexican authorities to order up some currency intervention by the Bank of Mexico. I don’t know how deep the Central Bank’s pockets are, but if they are going to take on the markets who have become so “oil price-centric” they had better have really deep pockets.

The European Central Bank (ECB) is meeting while I type away with my fat fingers this morning. I don’t expect anything radical from the ECB today, and I think the small gain the euro is carving out right now, is an indication that the markets feel that way too.  The Central Bank of Brazil really pulled a fast one on the markets, as they had indicated that they were prepared to hike rates, and then at the last moment left them unchanged. And the real got whacked for this little game.

In South Africa, where the rand is the best performing currency overnight, but has been one of the worst performing currencies in the last year. The rand lost 25% to the dollar in 2015, and had started this year down 8%, before the overnight bounce.  The bounce is due to rhetoric from the Central Bank Gov. who told reporters that falling inflation in S. Africa, will be met with an adjustment to the monetary policy stance.

Hmmm… shouldn’t the change in monetary policy stance be proactive and not reactive? Wouldn’t it behoove the S. African economy to be proactive here? You bet your sweet bippie it would, but this is S. Africa. Enough said, there. Oh, and our next Currency of the Month (COTM) is going to feature the S. African rand, so you’ll get your fill of how I feel toward the rand.

After a yummy dinner at the Juno Beach Fish House last night, I came back to my home away from home, and began to read emails. And I saw one from friend, Jeff Opdyke, from the Sovereign Society, and formerly from the Wall Street Journal, where he wrote a semi-nice article about me and the Pfennig a few years ago, so I’m always drawn to what he writes. I’m not always in agreement with him, but in this case I was!

His title was: China Isn’t in Trouble: We Are. He then went on to explain that China’s Retail Sales grew 11% in December, while the U.S. Retail Sales in December were negative -0.1%, and how China’s Industrial Production and Manufacturing Index are rising, while the same data prints in the U.S. are going in the opposite direction.

Great stuff, and precisely what I’ve been focusing on. The problems here at home, and not in China. So, even if the Chinese data is inflated like some say it is even by 50%, Chinese Retail Sales for December at the 50% rate would be 5.5%, and it still blows the Retail Sales for December in the U.S. out of the water.

Speaking of data… the U.S. Data Cupboard doesn’t have much for us today, other than the usual weekly Initial Jobless Claims, and there’s the latest Philly Fed Index, which is a check on the pulse of the Manufacturing sector in the Philadelphia region. this data has been negative lately, and I don’t expect anything else to print here, do you?

Yesterday’s Data Cupboard had the stupid CPI on the docket, and since the markets get all worked up over CPI we might as well go through it.  Consumer prices edged down -0.1% in December (you experienced that, right? ) and for the year on year data consumer inflation/prices rose to 0.7% from 0.5% in November.  That’s funny math if you ask me, but that’s what the data said, and another reason it’s so stupid!

It was reported on Tuesday that the 2016 deficit is forecast to rise to $544 billion (without off sheet debts of course!). Dave Gonigam over at the 5 Minute Forecast said it best, when he said the other day that with all the bad economic data, tax receipts are going to suffer, and that could mean a larger deficit for the Government.  And I do believe he has nailed it!  But, I would have to add, in addition to that, is the fact that there is no longer a debt limit. Remember, they suspended it? Pretty convenient timing on their part don’t you agree? The economy is screeching to a halt, tax receipts are riding off into the sunset, and of course, the government doesn’t have to worry about spending too much again. Sanity NOW!

Gold has dropped back below the $1,100 figure it traded to yesterday. When I left you yesterday morning, I told you that gold was heading toward $1,100 again, and then a couple of hours later, it reached that level, but has given back $3 this morning, so once again the shiny metal couldn’t hold $1,100 (the second time this year so far).

Longtime readers know that I put a lot of stock into the thought that an asset will test higher levels a few times, and if it can’t move past the higher level and remain there, then traders will give up and move on to some other asset, thus leaving the asset they were trading to fend for itself, which normally doesn’t work out too nicely.

So, I guess what I’m saying here is that gold had better get on its horse and move past $1,100 once and for all, pretty soon, or else traders might well just move on to other assets that could use their attention.  I don’t believe that will happen here, but it could. I prefer to believe that gold will eventually move past $1,100 for good, on its way to higher levels that are awaiting the shiny metal.

Over a year ago, I talked to you about the Liquidity Crisis that I saw coming in the markets. A year passed, and there were signs of liquidity being a problem, but nothing to put fear into the markets.  But in Davos, Switzerland, where annually, financial people meet to discuss the global economy and so on, there seems to be a reoccurring discussion about a possible Liquidity Crisis.

Then I heard Marc Faber, talk about a liquidity crisis, as a reason to buy gold. And It got me thinking about something that James Rickards had said in one of his newsletters that I subscribe to. James Rickards had met an old friend for lunch, the old friend was an “insider” in Wall Street, a BIG TIME PLAYER, who told James that Liquidity was a problem, that the BIG Deals, Size Deals that used to be done in a couple of hours, now takes days and even a weeks to complete.  So, I said all that to lead into this article in the U.K. Telegraph. that can be found here, and here’s a snippet:

The International Monetary Fund is increasingly alarmed by signs that market liquidity is drying up and may trigger an even more violent global sell-off if investors rush for the exits at the same time.

Zhu Min, the IMF’s deputy director, said the stock market rout of the last three weeks is just a foretaste of what may happen as the US Federal Reserve continues to raise interest rates this year, pushing up borrowing costs across the planet.

He warned that investors and wealth funds have clustered together in crowded positions. Asset markets have become dangerously correlated, amplifying the effects of any shift in mood.

‘The key issue is that liquidity could drop dramatically, and that scares everyone,’ he told a panel at the World Economic Forum in Davos

Chuck again. I’ve said enough about this, above, it’s time to really keep an eye on the ball here folks. Because nothing is worse (in the markets that is) than calling someone that used to buy your stuff, and they no longer will make a market. Uh-Oh.

That’s it for today. Have a tub thumpin’ Thursday!


Chuck Butler
for The Daily Reckoning

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