Yellen To Speak Today, Dollar Bugs Rejoice!

And now… today’s Pfennig for your thoughts…

Good day, and a wonderful Wednesday to you!

Well, once again I hit the call on the ISM bang on. While the so-called experts had the manufacturing index (ISM) rising in November, I said that, all things being equal, that the index number would fall below 50, and it did just that falling to 48.6. the lowest reading since April 2014.

I told someone on the blog yesterday that a wise old trader taught me many years ago, that a PMI (ISM now) reading at or below 45 for two consecutive months was the sign that a recession was in place.  It proved to be true about 10 years ago. it never got the opportunity in 2007/08 because the financial meltdown dropped on us a like bomb.

My friends at the Royal Bank of Canada don’t agree with that old teaching, and they sent out an email yesterday, saying that, ” ISM manufacturing is a terrible recession forecaster”. Hmmm…  I’ll put them down as “new school” and I’ll stick with my “old school”  thoughts!

The other thing that’s Big on the docket today is a Janet Yellen speech. Yes, I was all lathered up about her visit to talk to lawmakers tomorrow, December 3rd. But I totally missed this scheduled speech, which has the same title of the one she’ll give tomorrow. So, the event risk switched to today, because today is first day the markets will hear what she has to say. I wonder if she had to go back and adjust some of her talk after the ISM print yesterday?

Nonetheless, she’ll probably talk about how the Fed sees inflation rising in 2016, and that’s good enough a reason to hike rates now.  I would love to be there, and have the ability to ask questions. My first one would go like this; how can we be so sure that you will be correct about what you see for inflation in 2016, when the track record of forward looking is very bad? Remember Green Shoots? Or how about the rate hike calls for March, June and September of this year?

But the markets aren’t like me. They don’t take the time to look under hoods, or around corners, and try to find the “real reason” for things going on. Traders, hedge fund managers, treasurers, and institutions,  (participants that make up the “markets”) shoot from the hip. They take things and run with them. Until they are proven to be false dawns. So, with that in mind. the markets are buying dollars this morning. For the markets truly expect that Yellen will talk about the need for a rate hike. So, all the dollar weakness yesterday, has been reversed today. Go figure, eh?

Speaking of the Fed Rate Decision in two weeks, The Big Boss Frank Trotter had a debate yesterday with John Mauldin. Frank took the position that the Fed shouldn’t hike rates, while John took the position that the Fed should hike rates.  I would bet a dollar to a Krispy Kreme that both of them are on the fence regarding this subject, but had to take a side.  Frank asked me for some help, along with some others at EverBank. Of course I probably gave him more than he wanted, but in the end, what good does it all do to document why the Fed shouldn’t hike rates, when they are hell bent on doing just that. Hiking rates!

It’s on days like this in the currencies that you just want to go and hide, then come out with a mask that consists of a mustache and glasses, put on a top hat and a trench coat, and go about your business, under disguise, for heavens knows you don’t want to be labeled as a diversification, prudent investor, with all the dollar buying going on!

Take the Aussie dollar (A$). Last night, Aussie 3rd QTR GDP printed, and beat the expectations, printing at + 0.9% (consensus was + 0.8%) and the previous quarter was revised upward, from 0.2% to 0.3%… Overall that puts the annual GDP in Australia at 2.5%…  Not the greatest number in the world, but certainly not the worst either!  And I’m not saying it’s a Goldilocks GDP either.. Actually given the slowdown in China, and the rest of the world, I think 2.5% GDP is a pretty darn solid number for Australia.

But did it help the A$ to add to yesterday’s gains? Not really.  The A$ is flat to up just a tiny bit this morning, but if it weren’t for the Yellen speech today, and the dollar bugs out in force, I would have to think the A$ would be adding to yesterday’s gains by leaps and bounds.

The euro is not faring well this morning. 1. The dollar bugs are buying dollars, and with the euro being the offset currency to the dollar, it gets whacked. and 2. The Eurozone aggregate CPI for November printed and while there were thoughts that inflation would rise in November, the consumer inflation print was stubborn and printed on top of Rocktober’s +0.1% number. Well, it’s not negative like it had been, but as I always say when numbers are this near to going the other way. the +0.1% could be a rounding error! So. see what happens when “expectations” are not met?  When did the markets get so wound tight with expectations?  Now that would be good research for an intern.

The Chinese renminbi was pushed higher overnight, but by a small margin, nothing that would put a dent in the downward moves in this currency recently.  Yesterday, I was asked about the renminbi now that it has been added to the IMF’s basket of reserve currencies that make up their SDR’s.. And this is what I had to say:

A month or so ago, I wrote about how I feared that the Chinese were going to allow the renminbi to depreciate further even after being admitted to the SDR. I said that because of a couple of things.  They had been on a One-Way Street of appreciation for over a decade, and the currency had basically reached the level the IMF declared it was undervalued by (40%) over a decade ago.

The second thing is that the Chinese economy has slowed quite a bit, and they need their exports to go back to being the driver of their economy. You may recall that the Chinese wanted to move from an export driven economy to a domestic demand driven economy, but their timing was bad, in that the rest of the world was going into a global growth recession and China was not immune from that recession.  So, now everyone around them are joining the currency wars, and debasing their currencies. China can’t have that going on while they are still appreciating their currency.

So, that’s another reason, and then finally,  it does appear that the Fed is going to hike rates in two weeks. I still don’t believe they will, but it sure looks like they will, and when that happens the dollar will get even stronger vs. China’s two major trading partners, the Eurozone and the euro, and Japan and the yen.

So, China will combat the U.S. rate hike with continued depreciation of their currency to keep it in line with the other currencies in the Asian region, and to help offset the strong dollar in euros and yen.

Wow! I really laid it on thick there didn’t I? Now that’s service with a smile, if you ask me!  And when I was finished, all that was left was to ask if they needed their windshield washed, and their tires checked!  HAHA!

Well, the Russian ruble is getting whacked this morning. This has been the worst trading days for the ruble in the past couple weeks in quite some time.  The price of oil continues to show signs of more slippage, and now that Russia has implemented sanctions of their own on Turkey in response to Turkey shooting down a Russian war jet, inflation could get stoked even more. then add in this vicious circle of a weaker currency invites inflation into a country, and you have a weaker currency because inflation pressures.

The Central Bank of Russia (CBR) will meet on December 11. And I had told you months ago, that the CBR was on a mission to remove the high interest rates they installed to protect the ruble last year, when it was heading toward the cliff.  But, now, I doubt the CBR can cut rates further. Inflation pressures are going to come knocking on Russia’s door, and then I wouldn’t be surprised to see the CBR have to come back to the rate hike table.

And the Brazilian real is in trouble again.  Brazil printed a very weak 3rd QTR GDP report yesterday, and now the markets are questioning the high interest rates in Brazil.  Brazilian 3rd QTR GDP printed -1.7%, which was even worse than the consensus forecast which was -1.2%…  The annual contraction for Brazilian GDP will probably be -3.8% to -4.0%..  So, recall a couple of weeks ago, when I talked about how the real had been stealth-like in rally mode, but we were talking about Brazil, and the tide could turn on the tiniest of things. Well, a contracting economy isn’t tiny, but it still the same for the real.

It sure appears that the Japanese yen is stuck in the mud.  I sure hope you had the opportunity to read my Sunday Pfennig contribution on the Japanese yen. To say that I’m not a fan would be putting it lightly. Remember when I told you that a Japanese lawmaker called out the yen, and said it would reach 180-200 in the coming years, and I said that sounded a little harsh?  Well, sometimes we get the opportunity to look back at things. Shoot Rudy, the NFL gets to do it with their review system. “upon further review”  And after putting together the stuff for the Sunday Pfennig that will print this coming Sunday, and which will be posted  here, and of course in your email box!  I think that maybe, just maybe, because you never know, the Japanese lawmaker might be on to something.

Besides the sickly looking ISM print yesterday, the U.S. Data Cupboard had some brighter data to share with us. Construction Spending for Rocktober beat the expectations of a 0.6% gain, and printed at 1.0% vs. September.  And then the vehicle sales… I told you yesterday that the expectations were for more than 18 million cars to be sold in November. And that’s exactly what happened..  Right arm, farm out, out of state!  Now here’s something else an intern could research. We have 320 million people in the U.S. of which 210 million licensed drivers. and the math could be done to figure this all out.  I’m too old, tired, and in pain to do it. Somebody else can do it! HA!

Today’s Data Cupboard has the ADP Employment Change report for November, which is the prequel to the Jobs Jamboree on Friday this week.   The Fed’s Beige Book will print this afternoon, but it will be dropped like a bad habit by the markets, given the fact that Fed Chair, Yellen will have already talked today, and the markets will be full of whatever it is she has to say.

Gold is down a couple of bucks today, and couldn’t really hold onto the gains it had yesterday morning either once the NY Traders arrived at their desks.  I have a real doozy for you in the FWIW section today from Ron Paul, regarding gold. I’ll preface that by saying the Ron Paul is a gold bug. In fact I’m sitting at my writing desk and looking the books lined up above me on a shelf, and one of them is Ron Paul’s book, “The Case For Gold.” I wanted you to know that before you read the ZOWIE words he had to say regarding gold.

Well, I found this on KITCO, and can be found here, and let me remind you that Ron Paul was the only Austrian economics trained lawmaker in Washington D.C. for many years, and he knows the inner workings of the government. quite well. Keep all that in mind as you read this quote from an interview he did with KITCO News.  And he’s referring to the price of gold languishing instead of rallying:

The reasoning behind the current condition is manipulation, Paul said. ‘One thing governments can do — and it goes back to the time I got interested in monetary policy — is the manipulation of the dollar,’ he said in an interview with KITCO News. The ultimate test of the dollar is the purchasing power of the dollar and that is going down all the time,’ he added. Paul extended his manipulation thoughts on gold, ‘our government actually has the legal ability to do it in the Exchange Stabilization Fund which they got in the 1930s- they were allowed to manipulate the price of gold for the interest of the dollar and the economy.’ He added, ‘The [government] does [manipulation] pretending that no one knows what they are doing. I don’t think we would have this type of market if someone was not trying to prop up the value of the dollar.

Chuck again. Now, remember, this was Ron Paul talking, not Chuck, not EverBank, please keep that in mind. I just chose to open up the door to this room for you all to see what the former congressman had to say.

That’s it for today. I Well, it’s onto the Yellen speech today. I hope you have a Wonderful Wednesday!


Chuck Butler
for The Daily Reckoning

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