Yellen's Words Echo Through The Markets

And now… today’s Penning for your thoughts…

Good day, and a marvelous Monday to you!

Well things last week were wishy washy with any new direction. I know that on Thursday I kind of threw in the towel for the end of dollar strength right now, as I had called for last year, saying that by the end of summer the Fed would be contemplating another round of Quantitative Easing/QE.  But, didn’t stick a fork into the idea.

I still believe that the U.S. economy will reenter the recession stage, and the Fed, being the Fed, will think that they need to do something, and that’s when the QE4 gets pulled out and dusted off. They always knew they would need it, but they hid it under the dust covers.

The thought I had this morning is that now we’re playing the “rate hike on” , “rate hike off” game, like we played the risk off and risk on game for a few years.  this new game, is much like the old game, in that it doesn’t make any sense! HA!

But here we are in the here and now, right?  So. Let’s take a look at the goings on this morning, and move on from there. I really don’t have a lot to discuss this morning, but who knows, once I get going, it could become an epistle in a heartbeat! HA!

So, I turned on the currency screens this morning, and saw some good, some bad moves in the currencies and metals, with the Chinese renminbi being the best good move, and platinum being the worst bad move. In fact, the dollar seems to have the conn on most of the currencies this morning, even if by a small margin as I write.

Last Friday, I talked a bunch about the Janet Yellen speech, and how she really flipped the markets from believing there would be no rate hike this year, to the thought that that she instilled in their brains, that there would be a rate hike this year. That sent the dollar flying high, and that carry-over to the Sunday night overnight markets to Monday morning in Europe is still holding the conn over the currencies.

The big news on Friday was that U.S. House Speaker John Boehner was going to retire at the end of Rocktober. And I have to say that this news is like a black cloud for the markets, bringing “uncertainty” to the markets, and what have I told you dear readers for years on years? The markets don’t like “uncertainty”.  But, this “uncertainty” is really strange, in that it has pushed investors to buy Treasuries, dollars, and yen.

Well, I’ve been through the Treasury buying thing so many times previously, that I just don’t think I can do it again, so I’ll skip to dollars and yen…

So apparently the boys and girls buying dollars right now, didn’t stop to think about why Boehner decided to retire. Now, I’m not a political hack or insider or anything like that, but to me, who looks at everything logically, I see him not wanting to be in the fight that’s coming on the government spending, and what’s probably going to end up being a government shutdown.

That’s my story and I’m sticking to it.  But, if the U.S. is headed toward a government shutdown, why would investors backing up the truck to buy dollars now?  Hmmm.

And Japanese yen? Oh please! This economy is so screwed up and yet the markets sill see the yen as a “safe haven” currency. Really?  These guys need to find a hobby to take their minds off of yen as a safe haven. I would call them the “I” word, but that’s not appropriate here, now is it?  HA!  Like I tell my kids all the time. The population of the world just keeps growing, and that just means that there are more idiots.

Well, the price of oil has slipped again. It’s back down to the $44 handle. And that means the petrol currencies that include: Russian rubles, Canadian dollars/loonies, Norwegian krone, Brazilian real, and even Mexican pesos are getting sand kicked in their faces. These currencies and the countries they represent, used to be the ones doing the kicking of sand in the dollar’s face, but like the old Charles Atlas ad, the dollar bulked up, and fought back.

I’m still waiting for the shoe to drop on the meltdown of the financialization of the oil producing here in the U.S.  Not that I want to see it happen, but that it’s as evident as a man with a hatchet in his forehead, that it will happen. I’m reminded of my favorite saying; while it may be evident, it might not be imminent.

Two Fed members, Dudley and Williams, will be out on the speaker circuit today. The markets will be listening to see where they stand on the Yellen speech from last week.  Both Dudley and Williams are usually “middle of the road” kind of guys, so I really don’t expect to hear any real dovish or hawkish statements.

Recall that I told you a couple of weeks ago or so, that the U.S. and Switzerland were going to start a probe into silver price manipulation?  The Swiss names the 7 banks that they are going to investigate, and of the 7 there’s one bank name that’s surprisingly missing. I’ll let you figure out which one I’m talking about after viewing the 7 that the Swiss have named — UBS, Deutsche Bank, HSBC, Barclays, Morgan Stanley, Julius Baer, and Mitsui.  Some surprising names, and one glaringly large name missing.

Hmmm…  makes you wonder just how serious they are going to go after these guys.

The U.S. data cupboard has two of my faves today. Personal Income & Spending from August. The Spending data has been disappointing recently. But the Income data hasn’t been disappointing, and to me, that’s a good direction. But to the government, that’s a bad direction, as they need consumer to spend, spend, spend, and wages to remain flat.

We’ll also see the Personal Consumption Expenditure (PCE) data for August, which is what I think the Fed uses as one of their key data points on consumer inflation, instead of the stupid CPI.

Well, just for those of you keeping score at home, the annual PCE Deflator is only 0.3%…   Hey, Janet! Is this were you said we would being to see “inflation pressures start to gradually build in the coming years?” That’s what I thought!

“Gradually start to build in coming years” I said on Friday, that I wasn’t going to be sarcastic about that statement, and I’m holding my ground on that. But come on, I can’t believe someone else out there in pundit land hasn’t just taken that statement and hung it out on a line!

Later this week we’ll begin to see the warm up reports on labor that will lead to a Friday Jobs Jamboree. The Fed will see 3 of these Jobs Jamborees take place before their December meeting, when the markets are now pricing in the first rate hike. Like I said a few weeks ago, I don’t have the history, nor did I look it up (shame on me!) but I would be shocked if I went back through time of the calendar timing of Fed rate hikes, and saw that December was a regular month in which a rate hike was announced.

So, what I’m trying to say here, is that even though the markets think December is the time. I’m saying I don’t see it like that. And once again, I’ll be out here pinning my colors to the flag that marks the ship of no rate hikes, and invite everyone to join me on board.

Well, gold sure showed its true colors in the past couple of weeks.  It lived by the “not rate hike sword” and is dying from the “a rate hike is coming sword”.  If that’s really the case and the tracks that gold traders are going to put this train on, then I’m good with that. For, the rate hike isn’t coming, in my opinion, and that will eventually catch on and send this train to rally town. Of course I could be wrong on that.

The star precious metal of the week, last week, was palladium. But as the day begins here in the U.S. last week’s star has been sent to the woodshed. Last week,  we saw the ETF holding of physical Palladium increase by 1,571 ounces.  But last week is over, now. And it looks like gold’s problems are going to carry over to palladium, and platinum . UGH!

The GATA folks sent me a note last Friday, from a source that was talking about how Central Planners now fear that their liquidity is moving into gold. The source is the  Ramsey Report and can be found here:

Over the past few days the usual suspects demanded that the European Central Bank, People’s Bank of China, and Bank of Japan increase their QE. As economic data continues to deteriorate, the hope for and belief in more central bank stimulus is growing. If a critical mass of investors believes that the global economy is contracting and central banks will increase stimulus but it will not boost the real economy, they will eschew stocks.

Eventually investors will move to tangible assets out of fear of currency debasement. If the fear of economic contraction is high, investors will favor precious metals over industrial commodities and stocks.

Over the past two weeks gold has rallied sharply while copper and stocks have declined. This is a resumption of the asset allocation of selling stocks/buying gold that first appeared in early August.

Central banks can tolerate and rationalize excess liquidity flowing into stocks; that can’t get into the real economy directly. But the central planners become checkmated when the excess liquidity flows into gold.

Ergo, if the burgeoning shift in preference for gold over stocks develops into a trend, Yellen, Draghi, Kuroda, et al. will have a very serious problem — a late-’70s environment that will be remedied only by Volcker-like policies.

Chuck again. Interesting thoughts. and again I thank the GATA folks for sending to me, and to Ed Steer, who saw to it a few months back that I was able to use the GATA stuff in the Pfennig!

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

Regards,

Chuck Butler
for The Daily Reckoning

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