China Changes Currency System Again!

* Currencies are mixed but range bound today.
* Eurozone Factory Orders beat expectations!
* S. African rand is best performer overnight!
* The Great Mogambo Guru on a Monday!

And now. Today’s A Pfennig For Your Thoughts.

Good day. And a Marvelous Monday to you! Well. this IS THE WEEK THAT WE’VE ALL BEEN WAITING FOR! Well, not “all” because I’m certainly not among those in the rate hike camp, but for the most part, all have been waiting for this week, to see what a rate hike looks like. I’ve said this before, but there are tons of kids on Wall Street (I know they aren’t kids, but they are to me!) that have never see a rate hike. So, we have that going for us this week, oh joy! I think this has come up before as a “greets me song”, but with the rotation, and shuffle I never know what’s going to come up first, and today, the Great Leon Russell greets me with his wonderful song: Back to the Island. I’m going to stop now and sing along, not too loud, for I don’t want to wake up Kathy! I’ll be back in a minute..

Well, there was BIG NEWS from China over the weekend. Are you ready for this? First let me set this up. prior to 2005, the Chinese renminbi was pegged to the dollar, but in July of 2005, the Chinese broke the peg to the dollar and announced that they were going to peg the renminbi to a basket of currencies. Most thought, including me, that it was the basket of currencies that made up the IMF’s SDR’s. dollars, euros, yen, and sterling. And that went along just peachy dandy until the financial meltdown of 2008. China then kept the renminbi on a steady path throughout 2008, and in June of 2009, announced that they were now ready to allow greater movement in the renminbi. And things were peachy dandy once again with the renminbi. Somewhere along the line, China moved back to a peg to the dollar, scraping their basket of currencies peg. It was a very stealth-like move, and one that quite frankly took me by surprise when I finally realized what China was doing.

So, on Friday last week, China announced that they were going to depart from solely focusing on the renminbi’s value VS the dollar, and move to valuing the renminbi VS a set of currencies. OK. got that? Now what have I been telling you lately about what I thought China was going to do with the renminbi, in the face of a U.S. rate hike? Ahhh, now I see, said the blind man as he spit into the wind, it’s all coming back to me now! The Chinese are going to allow a large depreciation of the renminbi, and what better way to accomplish that than to align the renminbi with currencies that are getting hammered by dollar strength right now? And then when the dollar strength has run its course, the Chinese can simply 1. Allow the renminbi to float, or 2. Go back to a dollar peg. I would think what’s behind door #1 would China’s best choice, but who knows at this point?

So, last Friday, the currencies attempted to move higher after a weaker than expected Retail Sales from the U.S. What’s that I hear you saying? That once again the economic data doesn’t draw a rate hike? Ahhh, I have taught you well grasshopper! Since Retail Sales were such a Big Deal on Friday, let’s look at that before moving on to today.

Well, November Retail Sales didn’t flash bright signs telling us that the economy is strong, as it only rose 0.2% Month on month. The new and improved, “controlled Retail Sales”, which takes out: food, Auto Dealers, Building materials and gas station sales was up 0.6%, but come on, are we really going to start taking stuff out, adding stuff in, whenever it “feels right” to do so? What a load of cow manure, that they’ve come up with this “Controlled Retail Sales”. So, when we get back to the original Retail Sales, we see that a rise of 0.2% is nothing to write home about, especially since we had the Black Friday and first weekend of Christmas Shopping included in November.

In the overnight markets the currencies are pretty range bound, but there is one exception, and the currency is up 4% VS the dollar overnight! It’s the S. African rand. Yes, after last week’s plunge in value after it was announced that the president, Zuma, had fired the Finance Minister, Nene, the S. African rand has rallied back on the news that Zuma had finally come to his senses and placed the former Finance Minister in the job. In between, Zuma had attempted to make a point, by appointing a little known lawyer to the job, but after being told that was not a wise thing to do, he fired that guy and hired the former FM. What a colossal mess here, folks. but today, the rand is the star.

Other than the rand, the currencies are mixed, but all are range bound ahead of the Fed’s FOMC meeting that will begin tomorrow, and end with a rate announcement on Wednesday. The Chinese renminbi has started its new currency pricing system with a new 4-year low VS the dollar. And the euro is down a bit this morning, after touching 1.10 once again. The November Factory Orders for the Eurozone rose 0.6%, which beat the expectations, with everyone participating in the rise… You know, I’m reminded that I was not on board with the markets call that the European Central Bank ( ECB) needed to really step on the stimulus accelerator, and when ECB president Draghi left a lot on the table I smiled big time. And now, the first piece of data since the ECB meeting, shows us that he was right to back off on the stimulus accelerator..

The price of Oil has slipped further down to $35.11, and actually was below $35 briefly. And that price action has the Petrol Currencies all looking for cover again. UGH! It seems that every day now that Oil sees its price slip further, and the Petrol Currencies line up for their daily beating.

The Australian dollar (A$) and New Zealand dollar / kiwi, are both a bit stronger this morning, but like I said the moves are tight range bound moves. On Friday these two were getting whacked because some mental giant thought that a 25 Basis Points move higher in rates by the U.S. was going to wipe out the rate differential that these two currencies enjoy. It does narrow it, but by the way the currencies were getting treated it appeared that traders had lost their collective minds.

And don’t forget that both the Norwegian Central Bank (Norges Bank) and Swedish Central Bank (Riksbank) meet this week. there are some that think the Riksbank will choose to widen the negative rates, but I’m of the opinion that neither will move any part of their monetary policies. Now if Oil could just stabilize for the Norwegian krone.

The U.S. Data Cupboard is completely emptied out today. Nothing, nada, zilch, zero, a big fat goose egg for data today, here in the U.S. Tomorrow’s Data Cupboard has the stupid CPI, and then on Wednesday, everything gets really revved up, with a ton of real data, and then the long awaited Fed rate announcement.

The more I think about this rate hike, the more I seethe with anger at the Fed. With all things equal, the Fed should be discussing a rate cut, to accommodate the weakening economy. But instead, to keep the markets on their side, to save face, and to give them some wiggle room when they do need to desperately cut rates again in 2016, the Fed is going to hike rates on Wednesday. I’m getting really worked up about this, and had better slow down here. Oh! I know, the best way I know to calm down is to read what the Mogambo Guru has to say!

Ahhh, to smooth our feathers this morning, I have a special treat for you. It’s my friend, The Great Mogambo Guru, coming to you via the Daily Reckoning (… I wish I could just reprint his total article, because it’s classic Mogambo Guru! But you can go to the DR site, or go to the Mogambo Guru website, which is:  I’ve truly and totally enjoyed reading the Mogambo through the years, and getting to spend time with him was a real treat for me! So, with no further ado. Here’s the Mogambo summarizing his talk about how the Fed has created so much money, that inflation is the only thing that will come of it in the end.

“In summation, then, we have two investments that are (waxing poetic) guaranteed to succeed by the linear line of time, but whose prices are being held artificially low so as to not scare the womenfolk and livestock with rapidly rising prices as the economy agonizes in its death throes, strangled to death by unproductive debt.

That’s where more central bank creation of cash and credit comes in, which is where monetary inflation comes in, which is where inflation in prices comes in, which is where rising prices of gold and silver come in.

When you think about it, it’s “Whee! This investing stuff is easy!” – The Great, Mogambo Guru.

I just love the Great Mogambo Guru! And you should too! HA!

Speaking of those two investment that the Great Mogambo Guru was talking about, Gold & Silver. It’s another down day for these two precious metals. Platinum and Palladium are carving out gains this morning, but Gold & Silver are not. I have to ask the question, When are the beatings going to stop? Yes, the Fed is going to hike rates on Wednesday. What else is new? But haven’t Gold and Silver suffered enough from this coming rate hike?

To recap. Friday’s Retail Sales report here in the U.S. wasn’t as good as expected, and the currencies tried to rebound after the report printed. In the overnight markets, the currencies are mixed, and pretty range bound in tight ranges I might add, except the S. African rand, which is up 4% VS the dollar overnight, after the President finally made a good choice for a new FM. the Big News over the weekend was that China was going to stop focusing on the dollar as the key determinate of their renminbi fixing each day, and switch to a basket of currencies, of which they did not announce what currencies would be in that basket. Chuck explains this all to you, so be sure to read that portion if anything this morning.

For What It’s Worth. Oh me, oh my. I remember standing in front of the audience in Vancouver in 2014, telling them about how I viewed the car loans going on as the next big problem to hit the U.S. I told them about how car loans had been extended in time to 72 and some to 84 months, and how subprime loans were picking up in this arena. Well, I came across some data that will cause you to choke on that scone, so put it down first, and push the hot coffee away, because we don’t want any “coffee lady” mishaps either! I found this here, and you can read it all here:

Or we can stick with the snippets: “Over the six months through September, more than $110 billion of auto loans have been originated to borrowers with credit scores below 660, the bottom cutoff for having a credit score generally considered “good,” according to a report Thursday from the Federal Reserve Bank of New York. Of that sum, about $70 billion went to borrowers with credit scores below 620, scores that are considered “bad”.

The amount of super-low-quality auto lending is now surpassing the totals of dubious lending that peaked in 2006. Total auto lending in the U.S. is now more than $1 trillion – the all-time highest amount of debt tied to cars in the U.S.

Newsletter publishers like to say the “sky is falling” all the time about every small problem we face. But this isn’t a small problem. The comptroller of U.S. currency is issuing a warning to anyone who will listen. He says this situation with auto loans reminds him “of what happened in mortgage-backed securities in the run-up to the crisis” of 2008.”

Chuck again. Well, the good news on all of this is so far, so good, the delinquencies are only running 3%, but with 40% of all car loans being generated by subprime loans, we can only guess as to when this bubble finds a pin in the room. It reminds me of the man that jumps from the top of the Empire State Building, and as he passed the 56th floor, he says, “so far, so good”.

Currencies today 12/14/15.American Style: A$ .7205, kiwi .6740, C$ .7265, euro 1.0985, sterling 1.5130, Swiss $ 1.0195, . European Style: rand 15.3030, krone 8.7205, SEK 8.5250, forint 288.90, zloty 3.9705, koruna 24.5915, RUB 70.82, yen 120.70, sing 1.4110, HKD 7.7507, INR 67.10, China 6.4495, pesos 17.44, BRL 3.9165, Dollar Index 97.72, Oil $35.11, 10-year 2.15%, Silver $13.74, Platinum $844.61, Palladium $550.50, and Gold.. $1,069.74

That’s it for today. Well, our Rams won the second to last game in St. Louis yesterday, proving once again that even a blind squirrel can find an acorn! Our Blues played a great game on Saturday Night, and then a not so great game last night. UGH! And my Mizzou Tigers got smoked out in Arizona by the Wildcats! UGH! It’s always strange when college football’s regular season ends, and there aren’t tons of college football games on TV to pick from. Steely Dan is playing on the iPod right now, and it’s their great song: Black Friday. There are so many Steely Dan songs that are top notch. Bad Sneakers, My Old School, Reeling in the years, Do it again, and so on. The days are going fast this month, aren’t they? And I haven’t done any shopping yet! UGH! Well, I did “some shopping” on Friday, but that’s a different kind of “shopping”. I heard on Friday morning, that our colleague and soccer legend, Ty Keough, had experienced a bike crash, and ended up with a broken jaw. OUCH! Ty rides his bike to and from work 95% of the days. I was just glad to hear he was OK, other than the jaw. Get Well, fast Ty! Alrighty then. counting down the days to my winter vacation. And with that thought, I let you go for the day. I hope you have a Marvelous Monday!

Chuck Butler
Managing Director
EverBank Global Markets
Editor of A Pfennig For Your Thoughts