by Chuck Butler, Daily Reckoning
Today's Pfennig for your thoughts...
Good day, and a happy Friday to one and all! Talk about a slow news day. That's what today is shaping up to be, given the lack of anything worth talking about on the newswires from the overnight sessions...
It's all about the dollar these days, as the rate hike talk heats up, and everyone on that side of the fence is thinking that this is it.
Make no mistake where you are, this is it, your back's to the corner, this is it, don't be a fool anymore. This is an all-out dollar rally going on and has seen starts and stops for a year now. The currencies, the precious metals, oil - they've all dropped in value vs. the dollar this past year.
This reminds me of 2005, when we saw the same thing going on for a year, but then it ended, went out with a whimper, and before you knew it, the dollar had returned to its underlying weak trend.
Will history repeat itself here? I think it will, and in the next couple of months, too.
I can hear you saying:
"What makes you think that, Chuck?"
Ahhh grasshopper, come and sit, and listen. Apparently you haven't been paying attention in class, because I've talked about this several times in the past, and even pointed out how other analysts, like Steve Sjuggerud believed the same thing. So, you have to write 10 times on the chalk board, I will pay better attention in class! HA!
So. here goes again. There are two angles from which to come to the same outcome on this folks, so let's take them separately, eh?
First and foremost, I believe, we, will, win. No, wait, that's not right! I believe that the IMF is going to announce in October, that they will add the Chinese renminbi to their basket of reserve currencies.
That sounds simple right?
While it may be a simple thing to do for the IMF, it will mean Central Banks, Hedge Fund, and large institutions around the world that mimic the IMF's basket of reserve currency holdings with what they call Special Drawing Rights (SDR's), will have to go out and buy the proper allocation of renminbi.
Now many of these entities will sell something to pay for their new purchase of renminbi, and I believe that since dollars are the overweight position in the basket of currencies, that dollars will be what are sold.
This shift will be gigantic folks, with potentially hundreds of billions of dollars getting sold. Now, how will the dollar's rally survive that?
The second angle on this is becoming difficult to back up, given all the talk about a Fed rate hike this year. But let me take you back to 2013. The Fed told us that when unemployment hit 6.2% they would hike rates.
But that didn't happen.
Then by the end of 2013, the Fed told us that there would be a rate hike in 2014.
But that didn't happen.
Then late in 2014, the Fed told us by spring 2015 they would hike rates.
But that didn't happen (do you see a trend developing here?).
Then the rate hike was moved to summer 2015. Again, that didn't happen.
So, why after all these disappointments have the markets swallowed this thought of a rate hike, hook, line and sinker again? Beats me.
Now that I've set the stage for this thought, it's that the economy continues to muddle along, and in fact slips backward. The Fed sees this and holds off on rate hikes this year.
And that's when the markets say, "no mas!" and grow tired of waiting for the Fed rate hikes, and punish the dollar.
So, are you with me on this? It's not over for the currencies, metals and oil! I'll decide when it's over! Was it over when the Germans bombed Pearl Harbor? Come on now, let's go!
OK, before I go on here, I had better make this crystal clear that I know the Germans didn't bomb Pearl Harbor. This was a line out of the movie Animal House.
Believe it or don't, there were times in the past when I would use that line, and I would get emails from people telling me I was wrong that it was the Japanese that bombed Pearl Harbor. Geez Louise!
One of the few currencies this morning with gains vs. the dollar is the British pound sterling - and, tearing a page out of Janet Yellen's book of lathering up interest rate markets, Bank of England (BOE) Gov. Mark Carney, decided to use the Yellen playbook in his country.
Once again, Carney is talking about rate hikes, and the markets are playing along with him. Can you believe that one?
He failed to act on his promises to hike rates in Canada when he was the Gov. of the Bank of Canada, and for two years, he's been talking about hike rates in England, with no rate hike yet.
But traders seem to think that "this time will be different" (I really don't like that phrase) and he'll act on his words.
Well, that remains to be seen, I guess, but if it were my money, I would not give him an ounce of credit until he does what he said he was going to do years ago!
The euro is still trading below $1.09 this morning, but there is word out this morning that the Greek Banks will reopen on Monday. There's no word at this time whether that means the withdrawal restrictions will remain in place. But just having them open again, is uplifting, I would think for the Greek people...
The German Bundestag will vote this morning on whether to authorize the Greek Debt Aid. I doubt that the vote will not pass, but it's a crazy, mixed up world folks - we never know.
The Russian ruble is on the rally tracks this morning, after a news article quoted legendary investor, Jim Rogers, saying that the ruble is a better currency than the dollar. WOW! Here's what he said in the Russia-insider.com:
Russia has low debt, unlike Greece, as well as convertible currency, which is quite unique for the new markets. So fundamentally its position can be called normal.
It is being pressured by lower oil prices, but as soon as the black gold finds the stable point the situation will improve for the ruble.
If we simply write out on paper the facts that lie behind the ruble and the dollar, without naming the currency, then everyone will want to buy rubles and no one will buy dollars. But as soon as you name them then, of course, people buy dollars.
Well, I don't know if I would go so far as to say Russia's fundamentals outperform the U.S's, but if Jim Rogers thinks so, then it must be!
I still think there's a "speculation" part of the ruble that makes it so volatile and that investors need to really think about using their speculation portion of their investment portfolio if they decide to invest in rubles. That's my opinion, and I could be wrong.
The euro-wannabes, the named I coined in 2003, for the countries of Poland, Hungary, and Czech Republic, who were considered, at that time, to be on the "fast track" to joining the euro, have taken their daily beatings during the Greek Drama.
But now that it appears that the debt can for the Greeks has been sufficiently kicked down the road, these three countries and their respective currencies are seeing a reversal of those beatings. This is interesting to see, as the euro struggles.
These three countries are nowhere close to being on the "fast track" any longer, and in fact Hungary had to remove the forint from the ERM (Exchange Rate Mechanism that the currencies trade in to determine if they are stable enough to join the euro) last year.
It would be interesting to see if these three countries decide to go ahead with plans to join the euro now that the Greek Drama is over.
Well, the U.S. data cupboard today has so many economic prints scheduled that I could spend most of the morning talking about them. Good thing that most of them are non-events (for me)!
First we'll see June Housing Starts data, and Building Permits. Recall, last month these two went in opposite directions, which was strange to see. Then the stupid CPI (consumer inflation) will print for June. And finally the last one that the markets look at is the U. of Michigan Consumer Confidence Index.
Yesterday's data cupboard was interesting in that the Philly Fed Index (manufacturing in the region) fell from 15.2 in June to 5.7 in July.
You know, I've seen charts over the years that compare the Philly Fed Index with the Aussie dollar (A$), and the A$ reacts alongside the Philly Fed Index. So, yesterday, the Philly Fed Index dropped, and overnight so did the A$. Hmmm...
And gold is flat to down a buck or two this morning. No bid for the shiny metal can be found anywhere and this has gone on for the last week.
Yellen's rate hike talk has gold down in the dumps, and not able to get up, for every time it tries, another Yellen rate hike talk takes place.
I'm about to raise the white flag here folks. Someone talk me out of it, please! I don't want to raise the white flag, but the price beat downs have just about taken me to the edge of the cliff...
I wanted to update you on something I brought to your attention a couple of weeks ago, and that is the debt problem in Puerto Rico.
Recall that they are $73 billion in debt with bonds that need to be paid, and they have no way to pay. They tried to get their debt declared as bankruptcy, but a court in the U.S. said they didn't qualify as a state, and therefore they couldn't file bankruptcy.
Well, now S&P (the rating agency) has decided to pile on, and have cut Puerto Rico's rating to "imminent default." I guess that says it all, eh?
Above I was talking about raising the white flag on gold, but then I read this letter from the Perth Mint, and I guess I'll take my hands off the flag pole ropes and step away from the flag pole slowly. This can be found here.
'Last Friday I discussed the U.S. Mint suspending sales of its silver Eagle coin and noted that "at this stage we have not seen any demand surge out of the U.S. but we would expect that if the shortage continues beyond a few weeks.'
Well a few days later and the Perth Mint has been hit with a surge in demand for not just our silver coins but gold as well, as our U.S. and European distributors scramble for product.
Due to the Perth Mint's geographical distance from the U.S., during past shortages we have found that U.S. distributors scour for supplies closer to home and then we get hit weeks later but this time the delay has been a lot shorter, indicating that dealers see this demand continuing and are trying to get ahead of it.
The European interest is obviously not a mystery - bank and stock market closures in Greece are reminding people of the need to have assets outside the financial system.
Chuck again. That's what I needed - a little pep talk!
That's it for today.