Fear Returns, And So Does The Snow!

* Oil price falls to a $27 handle.
* Dollars, yen, euros, Gold & Treasuries today.
* S&P cuts Poland’s rating!
* Fed to Monetize ½ of Treasury issuance in 2016!

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

Good Day. And a Wonderful Wednesday to you. Jimmy Buffett greets me this morning with his song: A Pirate Looks At Forty.. This song always reminds me of Spring Training with my buddies. An entertainer named Fritz, always played this song in the hotel we used to stay in, and at the part where he would sing, “yes I am a pirate”, we would all yet “AARRGG”. Jimmy Buffett only sings those words one time in the song, but Fritzie, would sing them over and over again, and soon we would have the whole bar area raising their fist in the air and shouting “AARRGG”..

Well, fear is back in the markets today. This one day of fear, one day of calm pattern is beginning to remind me of the stupid trading pattern we had to endure for over 4 years, with the “risk on, risk off” stupid pet tricks. Today’s fear is brought to you by the price of Oil which has fallen over $2 in the past 24-hours, to $27.68, as I write. This has everything that was working yesterday morning, reversing, and the so-called “safe havens” are back on top. That means, dollars, yen, euros, Gold and Treasuries. Everything else that I can see is in deep dookie today, U.S. stock futures are down BIG, and that’s going to bring about more fear, should stocks take a beating today, as the futures suggest they will..

Speaking of Treasuries. The yield on the 10-year is below 2% at 1.98%… That’s crazy folks, simply crazy, but I would suspect it to go even lower, given the fear that’s in the markets right now.. For instance, recall what I told you yesterday about the Saudi riyal and how I’m speculating that they are about to break the peg to the dollar, and also announce an even bigger change, but let’s stick with the peg to the dollar right now. Bloomberg is reporting that Saudi authorities have ordered a halt of riyal forward options. Why would they do this? For two reasons. 1. To stop the bets on devaluation of the riyal, and 2. To begin to clean out the forwards, so that everything is clean for their break of the peg.

That’s my opinion, and I could be wrong folks, but it sure smells like a duck, walks like a duck, and quacks like a duck to me. It must be a duck!

The euro is back above $1.09 this morning, yen is back below 118, and Gold is heading toward $1,100 again. That’s the good news. the bad news is that the Petrol Currencies are getting punched in the mid-section and having the wind knocked out of them by the drop in the price of Oil. And the currencies of Australia and New Zealand are getting whacked because. Yesterday, the Russian ruble was the best performer, today it is the worst performer. Talk about volatile! Well, I guess some of this is my fault, for I was wishin’ and hopin’ and thinkin’ and prayin’ for volatility in the currencies after last year’s dull trading. But volatility like what we’ve seen in the ruble? I don’t think so! But then I guess it remains true that you must be careful what you wish for.

The Bank of Canada (BOC) meets today to discuss interest rates. I told you previously that the calls for a rate cut are 50/50, but I’ve gone out on a limb and said that BOC Gov. Poloz will hear the voices from his previous life on the trade side and opt for a rate cut to further weaken the loonie. I hope I’m wrong.

I read a report this morning that talked about how the world could end up drowned in Oil, given the production levels going through the roof. Here in the U.S. production is strong, but the number of rigs continues to drop. I saw a graph that illustrates the drop of Oil rigs in the past couple of years, and it’s like a rock falling off a cliff! But as an Oil man once told me, it’s not the number of rigs, it’s how much the operating rigs produce! So, those calls for the price of Oil to fall to $20 aren’t looking so strange right now, eh? I still think that whatever Saudi Arabia decides to do is a wild card for the price of Oil. But for now, it’s “all spigots open” and a drown the world in Oil mentality.

And shoot Rudy, I just got rid of my Navigator! That’s typical of me. Own a gas guzzler when the price of gas is $4 a gallon, and get rid of it when gas is $1.60. What a dolt I am about stuff like that! Of course, I owned the Navigator to pull our family camper, so that was no longer needed, so there was some utility there, but my timing couldn’t have been worse!

I talked to you about the Hong Kong dollar/ honker last week, and told you that the speculation is that the Chinese are about to break the peg that the honker has with the dollar. The chief of the Hong Kong Monetary Authority, Norman Chan, was emphatic with his message yesterday that he is committed to keeping the peg to the dollar. You may recall that a year or so ago, there was a similar run on the honker in an attempt to push the currency outside the trading bands that exist for the honker. But verbal intervention by Chan was enough to quiet the calls for a break of the peg at that time.

Now, longtime readers know that I totally dislike the phrase: This time is different. I won’t say that, but there has to be some difference in the scenario for this time, we have investors leaving China in droves, and that has carried over to Hong Kong. And this time, traders have achieved their goal of pushing the honker outside of its trading band, in the forwards markets. Uh-Oh.

So, we have two main dollar peg currencies with question marks today. The Saudi riyal, and the Hong Kong dollar. if one of them would break the peg it would be bad enough for the dollar, but if both of them broke the peg, it would be a double-barrel shotgun attack on the dollar..

All this turmoil in China and now Hong Kong, has the Asian markets reeling, and that does not leave out India. The investment flows out of India are mounting, and the Indian rupee is following the Chinese renminbi down the road of devaluation. The rupee this morning, has reached a record low! With foreign holdings of rupee denominated debt falling for 4 straight days, the Indian Gov’t announced the issuance of a Gold backed bond, in an attempt to stop the bleeding of investment funds leaving India, but so far this latest trick has not worked.

I told you all months ago, that I didn’t like what I was seeing in Asia, given that all the Asian countries are in competition with each other for export business, and if a Big Gun, like China was entering the Currency Wars, that the other countries would have to follow, and that’s exactly what we’re seeing now. The Singapore dollar is also pushing the envelope of currency depreciation. I don’t like what I’m seeing here, but it is what it is, and with global trade slowing, the competition for exports becomes even more difficult.

The ratings agency, S&P downgraded Poland’s credit rating yesterday, and the Polish officials didn’t take the news sitting down! They were livid that S&P had deemed Poland not to be as credit worthy as before. this was quite a surprise blow for the new Government in Poland, and they reacted by saying it wasn’t their fault. they were new. etc. Hmmm, I wonder where they learned that trick?

There I was doing some reading and research yesterday, and the TV was on, and suddenly, I looked up to see a story on the TV about Wal-Mart closing 269 stores, of which 154 will be in the U.S. and axing 16,000 workers, of which 10,000 will be here in the U.S. And of course my mind just started racing. Yes, I heard that it was like a small pimple on Wal-Mart’s backside, as it only represented 1% of their total stores in operation. But my mind started racing with thoughts like, “if the economy is so strong, why then is Wal-Mart closing 154 stores? In strong economic times, Wal-Mart would be opening new locations! I know that nobody pays attention to these things like I do. But it’s all there, we just have to look for them. and it wasn’t as if I went on a scavenger hunt for this stuff, it was right there on the TV!

I’ve been really self-conscious about starting my sentences with the world, “So”. I never realized just how much I did that until I began to go back and erase the world once I had typed it. So, how am I doing? HAHAHAHAHA!

The U.S. Data Cupboard has the stupid CPI data for December to print today. I couldn’t give two hoots about this data, but the markets seem to think that a weak CPI could really add to the fear in the markets. I say hogwash, haven’t the markets learned by now that the Fed doesn’t use CPI as their inflation gauge? Heavens to Murgatroid! Somebody hit me the sanity stick! Sanity Now! Using CPI is just plain. no wait, I can’t use that word. Let’s just say we shouldn’t use CPI as a gauge!

The Data Cupboard also has some housing data to print, but what I really want to see, that’s hidden back in the corner this morning, is the Real avg. Weekly Earnings Year on Year data for December. November’s print was just 1.6%… so through November on a year on year basis, wages had only increased 1.6% here in the U.S.. And I would have to question that too!

Perma-bear, Marc Faber, decided to take the Chinese GDP number to task yesterday, saying that he believes that the Chinese GDP was 4% not 6.9% for last year. Hmmm, OK, let’s play along, and say, well, the Chinese GDP for 2015 was 4%… That’s still double what the U.S. GDP has averaged for the last 10 years! That’s right. according to Trading Economics the average GDP in the U.S. for the last 10 years has been below 2%… And the world is worried about China?

In 2014, the Eurozone economy was the largest, with a dollar total of $18.527 Trillion. The U.S. was second at $17.348 Trillion, and China was third at $10,356 Trillion. So, if we just used 2014 figures. The U.S. would grow at 2% on $17.348 Trillion and the Chinese would grow at 4% of $10,356 Trillion. Guess who’s catching up with whom?

And don’t forget the data I brought to your attention a few months ago, regarding what I use as the real growth figure for the U.S. Final Sales. This is what I told you on June 5th, regarding Final Sales. “Final sales to domestic purchasers is GDP minus net exports and inventory investment. It measures demand for goods and services from US households, businesses and government, regardless of whether those goods and services are imported or domestically produced. GDP, by contrast, measures demand for US-produced goods and services, regardless of whether that demand is from foreigners or US residents.”

I talked to you then, on June 5th, regarding, how the folks at the Five Minute Forecast had showed that Final Sales in the U.S. had averaged just 1% for the last 7 years. I don’t have 2015 numbers yet, but I doubt they will print more than 2.15%…

Gold is on the safe haven train today.. It’s all about the fear stuff folks. That’s the only thing that really lights a fire under Gold these days, for it sure isn’t the news of Physical demand or shipments, etc. I was reading Ed Steer’s letter this morning, and came across some very interesting data on Gold in China. Seems that China has finally issued their 2014 Chinese Gold Association (CGA) report on Gold holdings. Now remember when the World Gold Council issued a report saying that China’s holdings increased 813.6 Tonnes, and I questioned that figure? It seemed way too low for me. Well the CGA’s figure just released showed the increase to be 2,106 Tonnes of physical Gold. Guess what the Shanghai Gold Exchange (SGE) withdrawals were for the same period? They were 2,101 Tonnes. In the end Gold researcher extraordinaire, Koos Jansen was right, when he said he believed SGE withdrawals to equal Chinese demand for Gold. Interesting stuff for sure!

To recap. It’s all about fear again this morning, folks. Dollars, yen, euros, Gold and Treasuries are where to be today, and everything else is in deep dookie! The U.S. Treasury 10-year yield is below 2%, at 1.98%, Gold is heading toward $1,100, and the euro is back to trading over $1.09. S&P cut Poland’s credit rating, and Poland didn’t like it one iota! The Bank of Canada meets this morning to discuss interest rates. Chuck thinks the BOC will cut rates, while the rest of the markets are 50/50 on a rate cut today.

For What It’s Worth. This can be found on Zerohedge.com and it’s quite interesting folks. here’s the link for the whole article:  http://www.zerohedge.com/news/2016-01-19/and-you-thought-qe-was-over-fed-will-monetize-half-years-us-treasury-issuance

And as always here are the snippets. “The Fed may have officially tapered QE at the end of 2014 but that doesn’t mean it is done buying Treasuries: since the Fed never ended rolling over maturing paper, it means that it will remain indefinitely active in the open market. And while there were no sizable maturities from the Fed’s various QEs to date (only $474 million in 2014 and $3.5 billion in 2015) that will change dramatically this year, when Brian Sack’s team will have to purchase about $216 billion to replace matured Treasuries. According to JPM calculations, this represents half the net new government debt that will be issued over the next 12 months.

The amounts rise from there: $194 billion comes due in 2017, about $373 billion in 2018 and $329 billion in 2019 for a grand total of $1.1 trillion over the next four years.

Chuck again. This means that the Fed will monetize about ½ of the total issuance this year. It doesn’t mean their total holdings will rise, which sit at $2.5 Trillion, but it will mean that Treasury yields sure aren’t going to rise, not with ½ of the total issuance being monetized by the Fed.

Currencies today 1/18/16. American Style: A$ .6850, kiwi .6360, C$ .6825, euro 1.0915, Sterling 1.4165, Swiss $ .9975, . European Style: rand 16.7840, krone 8.8660, SEK 8.5610, forint 288.40, zloty 4.0980, koruna 24.7730, RUB 80.70, yen 116.70, sing 1.4390, HKD 7.8260, INR 67.95, China 6.5578, pesos 18.39, BRL 4.1000, Dollar Index 99.05, Oil $27.68, 10-year 1.98%, Silver $14.14, Platinum $819.32, Palladium $490.15, (these two can’t seem to rally the same time Gold does, Hmmm) and Gold. $1,098.91

That’s it for today. Happy Birthday to my good friend, Kevin Yanker, today. Kevin recently had to deal with the death of his father, so hopefully he’ll be able to enjoy and have a grand day today for his 59th birthday! Next up for the birthday boys will be good friend, Duane, and then Chuck.. Jan, Feb and March. all in a row. I’m two years older than they are, but look at least 10 years older! And probably act 10 years older too! HAHAHAHA! I heard it snowed back home yesterday, not much, but snow nonetheless! It was chilly for here, but at least we didn’t have snow! That darn El Nino is causing problems for us here, weather wise. I saw a saying yesterday that just cracked me up and so now I’m going to share it with you. “I’m only responsible for what I say. Not for what you understand”. Now that’s funny! I’m thinking of using that with my wife. What do you think? Will it go over good? HAHAHAHAHA! AS IF! Alrighty then, enough playing around for today, it’s time to get out of your hair for today, and send you on your way to a Wonderful Wednesday!

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