Hard Headed Traders!

* Positive yield currencies get whacked!.
* But currencies attempt to rebound today.
* When will Markets admit they were wrong?
* The Ukrainian Chicken Farm Moment”..

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

Good Day. And a Wonderful Wednesday to you! Whew! A sweep by the Cubs was averted last night as the Cardinals beat the Cubs, and delayed their celebration for winning the division. Of course winning the division doesn’t always mean you make the World Series, as my Cardinals from last year will attest, after winning 100 games in the regular season, they lost the first round of playoffs. John Lennon greets me today with his song: Watching the Wheels. I still get sad thinking about how John’s life was taken at an early age. And it was, oh, so many years ago!

So. The currency traders are a fickle group of people, I’ve told you that many times in the past, right? They are also hard headed! They won’t admit when they’re wrong, because they’ve been told for 100 years that the “Markets are never wrong”. But they’ve got that confused with the trading side of what they do. I don’t know when they’re going to figure out that they were wrong about the Fed and the Fed’s September meeting, but when they do, they will sheepishly begin to unwind their moves that were based on the thought that the Fed would be hiking rates in September. Of course, if they just read the Pfennig, they would have recalled me telling them a month or so ago, that Yellen and Brainard are staunch Democrats, and therefore they will not hike rates ahead of the election, for they fear a rate hike could cause major market and economic problems that could influence the election. I’m not talking politics here, just a simple fact.

Yesterday, in the early morning, we saw the currencies, stocks, bonds, and metals attempt a comeback, but by mid-morning, that was all reversed, and then some, as traders kept the pressure on those asset classes, and really only saw dollars as the investment for them. The 10-year Treasury yield has risen to 1.72% (and was a bit higher overnight), thus steeping the yield curve to a 3-month high, which is a strong signal that the “bond boys” feel that interest rates are going higher. The price of Oil slipped again for the same reason, the Oil glut that the IEA says will continue through 2017. Gold got sold again, and the currencies were taken to the woodshed.

Especially the Antipodean currencies. Both dollars from Australia and New Zealand saw more than 1-full cent losses on the day. UGH! Both are attempting to rebound this morning, as they see better than expected data. Aussie Consumer Confidence pushed higher this month, to 101.4. Tonight they will print their latest Employment Report, which has been quite resilient. Readers may recall me saying a couple of months ago, that the Aussie job creation has been strong, and I expect a pullback at some point, but then it didn’t come that month, or last month, but this month, we could very well finally see that pullback. For those of you keeping score at home, the consensus is for a 15,000 increase.

New Zealand will print their 2nd QTR GDP tonight, and I think I told you yesterday that I’m expecting it to grow 1%… And that unless it blows the forecast out of the water on the upside, that it won’t be enough to keep the Reserve Bank of New Zealand (RBNZ) from cutting rates again this year. UGH!

Leave it to the BOJ, to provide us entertainment. The Bank of Japan (BOJ) Deputy Gov. Nakaso, told reporters that the BOJ would not rule out deepening negative interest rates to meet their inflation target. Oh, come on Mr. Nakaso, that’s all you’ve got? You’ll have to do more than that to meet your inflation target! And that’s where the entertainment comes from. If it weren’t so damaging to the Japanese economy, it would have been comical watching the BOJ stumble all over the place with their monetary policies, stimulus budgets, QE, ZIRP, now NIRP and now stock purchases through the years, as none of it has worked, but they keep trying. and trying. and trying. to no avail. I’ve gotten so used to chuckling out loud whenever I hear a BOJ official talk about monetary policy..

So, did you get the time to read through the FWIW article yesterday from my friend, John Mauldin? He talked about how the Fed’s Jackson Hole boondoggle (my word for it not his) was used to introduce the U.S. to negative rates. UGH! His complete explanation as to why he thought this, was excellent. And if you missed it, simply go back to yesterday’s Pfennig, which can be found here: www.dailypfennig.com

I’ve never heard of this woman, but she’s an ECB member, so when she talks I guess we should listen. I’m talking about this Sabine Lautenschlaeger, who told reporters that the stimulus by the European Central Bank (ECB) should not be expanded, and that the program should be given time before a final assessment of effectiveness. Now, before I give her kudos, I would like to know where she stood on the implementation of the stimulus first. Because you can’t be someone who goes along with the implementation, and then have second thoughts about it later. But, I did like her quote.. “Instead of new and always-more-extreme measures, we need a little patience.”

The euro didn’t take a shot to the chin like the rest of the currencies yesterday, and therefore the Dollar Index’s move was limited. The damage was done mostly to the Antipodeans, the Brazilian real, Russian ruble, and Japanese yen. 4 currencies with yield, and 1 without. Speaking of the real, I want to point out that I told everyone months ago, that once the Olympics were over, that the real would struggle again, as the new Gov’t in Brazil had to deal with a very slow economy, and very slow global growth. I did point out how the new Gov’t had revised the trade agreements that had been a governor on exports, but without global growth that doesn’t help much.

Gold lost $9 yesterday in the major selloff of risk assets. But like I said above, those assets are attempting to rebound today, and Gold is up $2 in early morning trading. I just don’t think we’re going to see Gold rise much higher than it has to date, for a while, as the Chinese work to add to their Gold reserves. I’m not saying that the Chinese are the not for profit sellers, I’m just saying that it works out for them, and that’s a good thing for them. It would be good for the U.S. too, if they were buyers, but they aren’t. So, for now, anyway, I think we should all get used to seeing the price of Gold around $1,330. give or take a few bucks either way.

But eventually, what I see that’s going to happen is the law of Supply and Demand will return to the Gold market. Supply and Demand is the basic principle of economics, and with investor demand posting the largest component of gold demand for two consecutive quarters (Q1 and Q2) – the first time this has ever happened. It won’t be long before the lack of supply drives the price of Gold higher, due to the demand for it. That’s my opinion on this and I could be wrong.

The U.S. Data Cupboard is still waiting for Retail Sales tomorrow, but meanwhile back at the ranch, the U.S. Treasury printed their August Budget number yesterday. And no surprise it was a deficit. And it was $107.1 Billion. This pushes the annual Budget deficit to $620.8 Billion, with one month to go. OK, who here among us believed the Gov’t earlier this year when they said the deficit this year would be $534 billion? Now, for some reason, September, the last month of the fiscal year, is supposed to print a surplus, so in the end, we’ll still see the Budget Deficit larger than forecast. And then that’s just added to the National Debt, folks. never to be repaid.

To recap. Traders have hard heads and refuse to admit they were wrong, and continued to buy dollars yesterday, leaving the asset classes of stocks, bonds, currencies, and metals with torn and tattered looks about them. The Antipodeans took it on the chin, along with other currencies with positive yield, the real and ruble. I guess the traders won’t be happy until they see the Fed actually pass on a rate hike next week. Chuck thinks the price of Gold is stuck in the mud for a while until the laws of Supply and Demand come back to Gold. And the U.S. Budget deficit is on the rise again.

For What It’s Worth. This is a very interesting article, and one that plays along with a couple of themes I’ve harped on.. . Negative Rates, and becoming complacent with things that eventually turn to a Minsky Moment. I found this first on Ed Steer’s letter, and he directed me to Bloomberg, which is what I’ll do for you! You can find it here: https://www.bloomberg.com/view/articles/2016-09-13/the-bond-market-is-suffering-a-ukrainian-chicken-moment

Or here’s your Snippet: “Two European companies — French drug maker Sanofi and German household products maker Henkel — last week became the first firms to persuade investors to pay them to borrow euros. By selling bonds yielding minus 0.05 of a percentage point, they may well have signaled the bond market’s peak, delivering this decade’s equivalent of the “Ukrainian Chicken Farm Moment.”

That phrase refers to the 2006 sale of $250 million of bonds by Myronivsky Hliboproduct which, according to its description on the Bloomberg terminal, is “a vertically integrated producer of poultry products in Ukraine.” Few investors had ever heard of the Ukrainian chicken breeder, but with an interest rate north of 10 percent, buyers were clamoring for the MHP bonds. Bill Blain, currently at Mint Partners in London, was one of the bankers who brought the deal to market. He recalls the bidding frenzy:

It was massively oversubscribed. A few weeks later, bird flu broke out in Hong Kong. The chicken farm was uninsured. The market immediately discounted the notes and the price crashed 30 percent or more. That moment of supreme belief when anything is possible in the new issues market will always be remembered as “The Ukrainian Chicken Farm Moment.”

Chuck again. that was a great story of over confidence, and I loved the phrase: Ukrainian Chicken Farm Moment.

Currencies today 9/14/16. American Style: A$ .7470, kiwi .7270, C$ .7595, euro 1.1225, sterling 1.3205, Swiss $1.0245, . European Style: rand 14.3385, krone 8.2625, SEK 8.5012, forint 276.11, zloty 3.8744, koruna 24.0795, RUB 64.98, yen 102.10, sing 1.3655, HKD 7.7585, INR 66.89, China 6.6731, peso 19.14, BRL 3.3140, Dollar Index 95.52, Oil $45.12, 10-year 1.72%, Silver $19.13, Platinum $1,041.95, Palladium $658.50, and Gold. $1,326.10

That’s it for today. I love those Geico commercials, where, they say, “if you’re “x” that’s what you do. Well that’s my Cardinals, they are home run hitters, that’s what they do. if they don’t hit home runs, they don’t score runs. That’s exaggerating but not by much! Day game at Busch Stadium today. I love day baseball games! It’s when the game should be played! I’m beginning to feel better this week, just in time for an infusion tomorrow. See? I have all the fun! One of my fave artists, Al Stewart takes us to the finish line today with his song: The Year of the Cat. I’m really dragging the line this morning, better head back to bed! I hope you have a Wonderful Wednesday.. .And remember: Be Good To Yourself!

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