FOMC Meeting Minutes Throws A Spanner.

* Dollar gets sold after FOMC Minutes..
* Fed members shift focus to lack of inflation .
* ECI prints at slowest pace since 1982! .
* STL Fed member questions QE.

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

Good day. And a Tub Thumpin’ Thursday to you! Front and Center this morning. Happy Birthday to my darling daughter, Dawn. She’s one year older on the calendar, but she still looks like she’s in her early 20’s. When Dawn and brother Andrew were young (before Alex) their mom used to tell them she was 29, and they believed if for a number of years, until they put two and two together and figured out that her age never changed. Dawn could very well do that with her kids. She’ll be forever young looking to me. So Happy Birthday Dawnieboo. I hope your day is Grand!

OK, besides the birthday wishes today, there were some other things going on in the markets yesterday afternoon and overnight, so I guess we can’t sit here and tell stories of Dawn as she grew up! UGH! My friend and publisher extraordinaire, Bill Bonner, would do that. He would take a day away from markets, and talk about whatever was on his mind, and sometimes we, the readers, are treated to some interesting stories. But, I’m not Bill, and I’m also not free to spend the day talking about things that don’t have anything to do with the markets, given that’s what they pay me to write about! So. here we go. Oh, and all the while that you’re reading this next paragraph, keep in mind that I’ve told you for over a year now that the Fed won’t hike rates in 2015.

Well, the title above about says it all. The Fed’s FOMC Meeting Minutes throw a spanner in the rate hike works. The first reports I received regarding the Meeting Minutes (MM) didn’t get into the shift in focus for the Fed. But then I began to see the currencies and metals push higher, and the next round of reports had what I was looking for. That the Fed had shifted focus, and now believes that there’s a problem with their ability to generate inflation, and without inflation, why does the Fed need to hike rates? So, let’s go through the MM and see what I’m talking about here.

The Fed members talked about how they saw a pickup of retail spending, and how the economy had shown moderate growth, but there remains a real “soft spot” in capital spending, and with the drop in the price of Oil, investment in shale producers will diminish. And then they get the eject button. Inflation is nowhere near the 2% target, even though they say they saw consumer inflation tick higher (where did they see that?, remember, this was last month, and last month both the CPI and ECI were down), But then the Fed always sees things we don’t see, right? That’s why they are the ones that make the policies for the economy. Hold it Chuck, hold it Chuck, just a couple more seconds, hold it Chuck. OK, exhale, and take the bite off your lip.

So, the markets took this as an indication that the Fed is not going to hike rates next month, due to a lack of inflation, or even a hint that inflation is about to rise, and the dollar got smashed. The currencies rallied like they had been tied up for months and just set free, and so too did Gold. (and the other PM’s) That was quite the showing yesterday afternoon. And U.S. Treasuries, you ask? Well, they rallied too, and the yield on the 10-year dropped 9 ticks. and now sits at 2.09%… (yesterday it was 2.18%, see how the math works? HA!)

This morning, the dollar isn’t being driven like a rental against all the currencies, but the euro, Swiss franc and Japanese yen, all seem to be still in favor with the traders. And Gold is up another $5 this morning after adding $14 yesterday. The dollar-bloc currencies of Australia, New Zealand and Canada are all getting sold this morning. I’m scratching my head on that one, as the only news from any of those three was that Consumer Confidence in New Zealand dropped last month, but the New Zealand dollar / kiwi is the best performer of the three! HUH? Isn’t Life Strange?

On a sidebar. Last Sunday morning, I was doing some reading, and wanted to listen to something on the stereo. Now usually I’m such a “shuffle” kind of guy when it comes to music, but Sunday I was in the mood for one thing.. The Moody Blues. So for the first time in who knows how long, I played the Seventh Sojourn CD all the way through. Now the reason I mention this, is one of the songs on the album is: Isn’t Life Strange?… A great song, from a great album, that would be in my TOP TEN to take to the Island.

Alrighty then. I mentioned the ECI (Employment Cost Index) above, and I guess it would be important to mention that it is the Fed’s preferred measure of consumer inflation. Of course a month or two ago I told you about the NAIRU (The non-accelerating inflation rate of Unemployment) and how the Fed also looks toward that figure. But what I’m concentrating on this morning is the ECI.

In a follow up to yesterday’s dissertation on the lack of wage increases, I was reading a publication from Mauldin Economics by Tony Sagami called: Connecting The Dots. which can be found at, and in the letter Tony talks about how Job Growth is not Wage Growth. Let’s listen in to Tony Sagami. “Job seekers may find it easier to find a job, but good luck trying to find a job that pays enough to support a family.

The lightly followed Department of Labor’s quarterly Employment Cost Index (ECI) is Janet Yellen’s favorite wage indicator for good reason: it most accurately reflects the true cost of labor to businesses.

Well. the ECI increased by 0.2% in the second quarter of 2015. That was not only way below what Wall Street was expecting, it was also the slowest pace of wage growth since 1982 when ECI record keeping started!”

Thanks Tony! It’s really important to separate job growth and wage growth. Many years ago, I always tried to point out that the BLS Jobs report each month only showed how many jobs were created (or added out of thin air) it didn’t tell us what kind of jobs they were, so as a country we could have added 200,000 jobs, but the key question all of the new jobs ask is “would you like fries with that order?” In other words, they all could be low-paying or min. wage jobs, and how is that going to help the economy grow? Oh, and one other thing regarding the ECI report that showed just 0.2% increase in wages in the 2nd QTR. If it weren’t for the +0.6% increase in wages by Government workers, the rest of us would have seen 0% increases. You know a Big Fat Goose Egg!

The Fed’s Kocherlakota was speaking in Seoul last night, and said that “a higher inflation target could mitigate financial risks but may hurt the Fed’s credibility.” Hmmm. I guess he’s saying that the 2% target rate of inflation is too “high”? And if you read between the lines, which I’m really good at doing, you hear him saying, that the Fed’s Credibility is going to get hurt because they are not going to hike rates because inflation hasn’t reached their target rate. Well, I talked about that the other day, and told you that the Fed can now use the China depreciation/ devaluation last week as their “excuse” and save their credibility when they pass on hiking rates next month.

While we’re on the subject of the Fed, we might as well keep the hits coming. This round of commercial free Chuck-speak will begin now, start your tape recorders. HA! But remember last year, when the Fed bought bonds for the last time (in that cycle) and said that their balance sheet would remain where is was (+$4 Trillion) and maturing bonds would not reduce the balance sheet, as they would simply buy replacement bonds? Well, they weren’t lying. The Fed’s Balance sheet at the end of July 2014 was (in millions of dollars) $4, 363,781 and at the end of July 2015 it was $4,456,614. So apparently, there has been quite a bit of bond buying by the Fed in the past year, even though their bulk bond buying days ended. And you were wondering why the yield in the 10-year Treasury dropped from 2.31% at the end of October 2014, (when the fed ended their QE/ bond buying) to 2.18% (yesterday before the FOMC MM’s)

Alrighty then, let’s talk about something else, all this Fed-talk is giving me a rash! Well, the bad news for Russia just keeps coming. Yesterday, Russia reported that economic growth indicators for July had deteriorated, with real wages declining -9.2% from -7.2% in June, and finally, investment fell -8.5% year on year. There were some data prints that weren’t so bad. Industrial Production, and Retail Sales saw slight improvements and printed better than expected. But the Growth Indicators were so bad, they outweighed the slight improvements of IP and Retail Sales. This news weighed heavily on the ruble, which in the early morning was on the rally tracks, but got derailed by the bad data, and ended the day down once again.

That’s not what the doctor ordered for the ruble, folks. with the price of Oil in a massive decline once again, the ruble has enough pressure on it, but now add in some bad growth expectations, and it just gets worse for the ruble.

The BRICS currencies are all seeing tough times. Now, someone somewhere will ask the question eventually, so I’ll just go ahead and throw it out there. Do you think that the BRICS countries made too much of a BIG deal about their new Banks to rival the IMF and World Bank, and they ticked off someone with a lot of clout? Nah. That’s silly talk Chuck. These countries all have economic problems and their currencies should be weaker. yes, that’s the correct answer! The BRICS by the way are: Brazil, Russia, India, China and S. Africa.

But think about it like this. Yes, they are all underperforming, and in some cases like Brazil, and S. Africa, they are pushing the underperforming envelope a little too far, I say, better now, when everything else is down in the dumps, for when stocks are no longer the cat’s meow, and Treasuries have run their course, there will be some unbelievable basement bargains here. Of course that’s just my opinion and I could be wrong!

The Chinese renminbi appreciated again last night, marking 4 consecutive nights, after the 3 depreciations/ devaluations last week. The renminbi is supposed to be going through a change whereas the markets have more of a say in the pricing. If that’s really going on, and I have no reason to believe it isn’t, then the markets are saying that the downward movement last week was overdone. That, or. I’m reading this morning that China is injecting Hundreds of Billions of renminbi to intervene and sell dollars. It’s all too cloudy over there right now, to really see what’s going on folks. Let’s hope the clouds clear soon.

Well, the U.S. Data Cupboard has a veritable Whitman’s sampler of data for us to view today, starting with the usual Weekly Initial Jobless Claims, and then going to the Bloomberg Consumer Comfort index, Existing Home Sales for July, the Philly Fed Index for August, and finally the Leading Index for July. I guess I really only care about the Philly Fed Index, and the Leading Index. I have to believe that the Leading Index, which is one of the few forward looking data prints we see, will drop from the previous reading in June, which I believe will also see a downward revision, as it just looked completely out of place when it printed last month!

I already told you about the good performance yesterday and so far this morning in Gold. I just wanted to mention something else that I saw in Ed Steer’s letter this morning about Gold, and that is that Gold sales in Germany increased 50%, during the first 6 months of this year, with the strong buying trend continuing in July, as the July sales reached the second-highest sales on record. Again, it’s another example of physical Gold being bought and in high demand, but the price doesn’t react accordingly.

To recap. The Fed’s FOMC Meeting Minutes really caused a commotion yesterday, as the Fed admitted that they were shifting their focus to inflation, and that inflation isn’t anywhere near the 2% target, which led the markets to believe that there will be no rate hike next month. That put the dollar on the selling blocks, and the currencies and metals all rallied. Overnight and this morning, the dollar has fought back against a few currencies, while the euro, yen and franc all remain on the rally tracks. Tony Sagami tells us about the rot on the ECI’s vine, and Chuck talks about the rot on the vines of the BRICS currencies.

For What It’s Worth. Well, since I spent a lot of time talking about the Fed and inflation targets, etc. this morning, this news item seemed to play well in the sandbox with all that, and I had to save it for the FWIW this morning. I thank dear reader Bob, for sending to me, and this can be found on by clicking here: This is about the Fed St. Louis Vice President Stephen D. Williamson, issuing a white paper on QE and questioning whether QE was a mistake or not. This is interesting, don’t skip over it, or you’ll miss out!

“Williamson says the theory behind QE is “not well-developed”, and calls the evidence in support of Ben Bernanke’s views on the transmission mechanisms whereby asset purchases affect outcomes “mixed at best.”

“All of [the] research is problematic,” Williamson continues, as “there is no way to determine whether asset prices move in response to a QE announcement simply because of a signaling effect, whereby QE matters not because of the direct effects of the asset swaps, but because it provides information about future central bank actions with respect to the policy interest rate.” In other words, it could be that the market is just reading QE as a signal that rates will stay lower for longer and that read is what drives market behavior, not the actual bond purchases.

But the most damning critique of Bernanke’s response to the crisis is this:

There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation. For example, in spite of massive central bank asset purchases in the U.S., the Fed is currently falling short of its 2% inflation target. Further, Switzerland and Japan, which have balance sheets that are much larger than that of the U.S., relative to GDP, have been experiencing very low inflation or deflation.”

Chuck again. WHOA THERE PARTNER! Now I have no idea whether or not Mr. Williamson is still employed at the Fed St. Louis, but if he is, I’m sure his phone is ringing off the hook! WOW! A Fed employee basically saying that QE was a mistake. Now there’s something you don’t see or hear about very often!

Currencies today 8/20/15.American Style: A$ .7310, kiwi .6605, C$ .7615, euro 1.1180, sterling 1.5665, Swiss $1.0375, . European Style: rand 12.9425, krone 8.2660, SEK 8.4975, forint 279.45, zloty 3.7455, koruna 24.1570, RUB 67.37, yen 123.95, sing 1.4045, HKD 7.7520, INR 65.55, China 6.3915, pesos 16.73, BRL 3.5140, Dollar Index 96.20, Oil $40.33, 10-year 2.09%, Silver $15.42, Platinum $1,018.90, Palladium $615.75, and Gold. $1,139.20

That’s it for today. Nothing like a late in the game clutch home run to bring home a winner and series win against the Giants by my beloved Cardinals last night. Now the Cardinals travel to the West Coast, and that means I won’t be able to stay up to watch or even listen to the games! UGH! My fave Allman Brothers song is playing on the iPod. Melissa. I love the guitar work in the song, so sweet and working within the song. Well, I won’t say how old Dawn is today, but I’ll just say that she was born the year that “My Sharona” was a number 1 hit song. Remember when the Knack, the group that sang that song, were being compared to the Beatles? Same with Oasis, and a few others through the years that were compared to the Beatles and then fell on their respective faces! Once again, I started on time, and here I am. Late again! UGH! You know I think I have figured it all out. Years ago, the Pfennig was a stream of consciousness and went out without any thought that I might get in trouble for something I said. And that’s all changed, for the better I guess, and that’s why it takes longer to get the letter out each morning. I had a really bad day yesterday, but today seems to be better so far, so let’s hope that stays intact and I hope you have a Tub Thumpin’ Thursday!

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