Yellen Deep Sixes Currency Rally

And now… today’s Penning for your thoughts…

Good day, and a Happy Friday to  one and all!

The Big News yesterday was a tie. We could either say it was the HUGE $23 gain of gold yesterday, or we could say it was Fed Chair Janet Yellen’s speech that sent the currencies to the woodshed.  So, we’ll do this like my grandson Braden Charles does. He’ll come up to you with two cars and say which one do you want?  And when you choose, he gives you the other one.

So, now I just say, which one do you want me to have?  So, which piece do you want to read first?  OK, we’ll do the Janet Yellen thing first, since she really deep sixed the currency rally yesterday.

There we were yesterday, the U.S. Data Cupboard yielded a weak Durable Goods Orders (more on that later) and the currencies went on the warpath vs. the dollar, with gold leading the way to higher ground. The Aussie dollar (A$) climbed back above 70-cents, the euro was looking perky on the strong IFO number yesterday morning, and so on. But then along came the Fed Chair.

Oooops, did I say that out loud? Yes, that must have been what Fed Chair, Janet Yellen thought last week, when she made her statement following the decision by the “committee” (yeah, right!) to keep rates unchanged. Because everyone that read or heard her statement came away with the same feeling; that she sounded very dovish, and it looked like there would be no more rate hike talk this year.

But au contraire mon frère. Almost immediately, the Fed members that wanted a rate hike, began to put together notes to hit the streets with and talk about the need for rate hikes.

And if that wasn’t good enough to move the markets sufficiently, Janet Yellen herself set out to correct what she believes was a misconception of what she said at last week’s FOMC.

In a 40-page speech at the U. of Massachusetts in Amherst, she quoted 40 academics, had 34 footnotes, 9 graphs, and an appendix to back her argument that she believes that the “slack in the economy has diminished to a point where inflation pressures should start to gradually build in the coming years.”  And that she sees no reason why the Central Bank shouldn’t begin raising short-term interest rates this year.

OK, I don’t mean to be sarcastic, glib or a smart Alec, here, but why would you say that inflation should start to “gradually build in the coming years” , when you’re trying to make a point about raising interest rates now?  Isn’t the object of raising interest rates to cool down an economy and combat inflation?

Remember Paul Volcker? Remember his “Saturday Night Special?”  I do, and I know why he drove interest rates so high — to beat down inflation!  So, there she was just walking down the street singing do wah diddy, diddy dum diddy do. And the markets were right behind her in tow. Yes, ma’am, we hear you, interest rates are going higher this year.

HAH! As If! You know, I’ve told you before that over at friend, John Mauldin Economics, there’s a guy that I religiously read, Jared Dillian, who writes the “10th Man” letter.  He’s very good at speaking his mind, and not worrying about what other people think (sounds like me, eh?, well the old me that is before “things” changed). And this is what he said in yesterday’s letter that can be found here:

Once you are in 2016, you are in an election year, and. this is the point people get a little touchy about, but the political implications are a lot larger than you may think.

The current Board of Governors are all Obama appointees (including two in the hopper) and presumably all Democrats. What if the Fed hikes in early 2016 and the economy goes into recession, with layoffs and everything that goes with it, right in the middle of a presidential campaign? It would surely hand the election to the Republicans.

The bar will be very high to hike rates in 2016.

Alrighty then… Yellen deep-sixed the currency rally, but gold wasn’t paying attention to the rate hike talk. Gold received a Star for its performance yesterday, but as I look at the currency screens, gold is down $9 this morning. UGH! Serenity NOW!  I’ve had all I can stands and I can’t stands no more!  Why can’t the price manipulators leave well enough alone? Well, let’s forget about them for now, for they cause me to develop a rash.

Instead let’s talk about a shortage of physical gold & silver that certainly is beginning to show up.  I read a guy named Dave Kranzler, of whom I’ve quoted before, and he writes for www.investmentresearchdynamics.com and yesterday he has this to say:

Today’s $23 move up in the price of gold on Comex options expiry day — an event on which gold is usually slammed hard in the paper market — is a direct reflection of the growing scarcity of immediately available ‘wholesale’ gold bars that can be purchased on the global market.

So, that’s your two headline stories for this morning.

This morning, the currencies are still feeling the heat of Janet Yellen’s words yesterday and the only currency with a gain vs. the dollar this morning is the Russian ruble. Oh, and the Chinese renminbi appreciated overnight by a small amount, not much to speak of. One of the better performers yesterday was the Brazilian real, which earlier in the day had reached 4.25, but ended the day at 3.95. I would think that it was simply a case of moving too far, too fast, and the correction followed.

I still don’t think that Brazil has the legs to run with here, except to the woodshed.  I do have to say though, that more and more it appears that Brazilian President, Dilma Rousseff, is getting closer and closer to an impeachment, and should she get thrown out of office, I would think that the real would strongly rejoice. But that’s just my opinion and I could be wrong.

But, all you have to do is go back to the last election, when for 6 months before the election it appeared that the Challenger to Rousseff, would win, and the real was enjoying its best 6 month run in a few years. But then the fix came in, and in a surprise, Rousseff won reelection and the rest is history for the real.  So, if traders thought Rousseff would lose during the election and they pushed the real up in value, I would think the same thing would hold true, if she was impeached.

And speaking of the Chinese renminbi, and China… Our own in-house soccer legend, Ty Keough, sent me a link to a story on MarketWatch yesterday regarding China.  So I pulled it up, and there, right before my eye was a statement by a well-known investment management firm, Atherton Lane Advisers, LLC.  In the statement they talk about the misconceptions about what China is accomplishing with their economy. So, tell me if you’ve heard this in the Pfennig a time or two in the past few years.

China’s Economy Moving more Towards U.S. Model with Consumption Increasingly Important Atherton Lane points out that consumer spending is now the main driver of the Chinese economy, and exports play an important, but diminished, role in the economy. China is moving its economic model to one modeled more like the U.S. in its self-reliance than export-oriented countries such as Germany or Japan. China leads the world in consumption growth, which averaged over 9% from 2009 to 2013. This consumption has been fueled by an incredible real per capita income growth rate of Chinese households. After decades of growth, income growth is still increasing more than 8% per year.

Services and Retail Spending a Bigger Part of Chinese Economy.

So, that’s two outfits that have come out and said that the markets misunderstand what’s going on in China, that I’ve highlighted this week.  I’m not there, so I don’t know who’s right and who’s wrong.

All I’ll say about it is that through the years, China has had so many naysayers and investment analysts that have called for the collapse of China’s economy that have been proven wrong as time goes on. So, normally I only pay attention to the people that seem to have a different view of what’s going on. But that’s me in a nutshell anyway, eh? Always looking around the corner, under the hood, for a different viewpoint on something.

OK. I can hardly contain the laughter this morning, regarding the news coming from Japan. So, yesterday, Prime Minister Shinzo Abe, was reappointed as the leader of Japan’s ruling party. And after the celebrations, Abe decided to unveil his “new three arrows” for the Japanese economy.

So, you may recall that in 2012, when he was first elected as PM, he unveiled his “3 Arrows” economic plan that championed: Monetary stimulus, flexible fiscal policy and structural reforms. These “3 Arrows” were going to turn the Japanese economy around.

Well, here we are 3 years later, and the “3 Arrows” have been shot into the air. But haven’t made a bit of difference, so not feeling defeated on any measure, Abe decided to announce his new “3 Arrows”: a strong economy, child-care support, and social security.  Nowhere in any of his now “6 Arrows” does he address bringing down Japan’s debt.

Longtime readers might recall me picking apart his “3 Arrows” plan back in 2012, when I said that Japan’s demographics are really bad, and that they needed to revise their immigration laws. I also said at the time that I didn’t think the Japanese leaders would EVER think about softening their immigration laws.

So, that’s Chuck’s “2 Arrows” for Japan: work on reducing the debt, and soften immigration laws.  So, take a message to Michael, message to Michael,  (insert Abe for Michael) tell him I have a plan. HAHA!

The euro is done about 2/3rds of a cent this morning, and back below the 1.12 handle. There are a lot of rumors swirling around in Germany about Deustche Bank, Germany’s largest Banking institution. And then we have the VW news going around, so what I’m trying to say is that the euro just can’t catch a break, every time it seems it has put bad stuff in the rear view mirror, along comes more bad stuff.

No one could have seen the VW thing coming, and there will be a few pundits that will tell you that they had the problems at Deustche Bank pegged a long time ago, but did they really? You know me, though, I’m going to stay on the Deustche Bank stuff.

The U.S. Data Cupboard will have another print of 2nd QTR GDP today. I’ve told you once and I’ve told you twice, but you never listen to my advice. This could be the last time, Maybe the last time, I don’t know. Well, I went through all that to say that I just don’t get lathered up about GDP any longer. Not since last year, when the government decided that they didn’t like the GDP results, and decided to “make an adjustment” to the calculation.  That “adjustment” would be responsible for adding up to 3% per year to GDP.

So, even if all the other stuff collapsed, we would still print 3% per annum. Tricky, right?

Second QTR GDP will print today, but we’re about to close out the 3rd QTR, right? I shake my head in disbelief that this stuff goes on and moves markets like it does! How and why are the markets so dumfounded about hedonic adjustments?  Ahhh, the words of Paul Simon come to mind here. A man hears what he wants to hear and disregards the rest.

Yesterday’s Data Cupboard had the August Durable Goods Orders (DGO)  and like I said in yesterday’s Pfennig, it did print negative -2.0%… which whipped out the downwardly revised July 1.9% gain.  Capital Goods Orders are still in the dumpster, and transportation really took a hit in August.  And when the markets saw the weakness of this report, they began selling dollars, but only until Fed Chair, Janet Yellen did her about face.

OK, that’s my thought on what she did, but in fairness, she really just wanted to correct the misconception that the markets took from her FOMC meeting press conference. Yeah, that’s it! That’s what she was doing! And I should be ashamed of myself for thinking otherwise!

We talked about gold & silver above, but the real hot performer in precious metals is palladium. Even this morning when gold, silver and platinum are all in the red, palladium has added value to its price. Just last week, on Friday, palladium was $603. and today it’s $664.

I told you yesterday about the Chinese announcement regarding auto emissions, and that news has really goosed palladium and not just one quick “goose” but a long lasting one!  Poor palladium, had seen the shine scraped from it since it reached $900 a couple of years ago, so this “new life” that has been pumped into the metal is refreshing.

A few years ago, I was sitting in a lounge area of the Fairmont Vancouver, talking baseball with my friend, John Mauldin, who is a Texas Rangers fan. And a gentleman walked up and asked if he could sit with us, as he just wanted to listen to the conversation of two great minds. Well, he thought we were talking about the markets, and boy was he surprised when we were talking baseball!  So, when I saw this on Zerohedge.com that whole thing from Vancouver came to mind.

But this article on Zerohedge.com is two legendary bears meeting and talking, and I pick up part of the conversation in the snippets, but the whole article can be read here.

Oh! I forgot to tell you who it is that’s talking! UGH! What a dolt I am sometimes!  So, this is two legendary bears and they are: Albert Edwards and Bob Janjuah.

The next U.S. recession will probably arrive a lot sooner than most investors expect and will likely see more desperate monetary experimentation from the Fed. Bob and I thought that this time we would see deeply negative interest rates in the US (and Europe). Sweden has led the way, dipping their toe below the water line with their current -0.35% policy rates but there will be more, much more along these lines. For if -0.35% is possible, why not – 3.5% or less? It goes without saying that deeply negative interest rates would be accompanied by a massively expanded QE4 in the US. The last seven years of exploding central bank balance sheets will seem like Bundesbank monetary austerity compared to what is to come

Chuck again.  must have been an interesting conversation, eh?  But certainly not like the one between Chuck and John Mauldin!

That’s it for today. Now. let’s go out and have a Fantastico Friday, and wonderful last weekend of September!

Regards,

Chuck Butler
for The Daily Reckoning

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