Here We Go!

*Currencies are flat today ahead of FOMC.
* Russian ruble has problems.
* Selling in rupees was overdone.
* What happened in 1994, 1999, and 2004?

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

Good day. And a Wonderful Wednesday to you! And now, the end is near, and so I face, the final curtain. My friend, I’ll say it clear, I’ll state my case, of which I’m certain. Ahhh a little Frank Sinatra to start our day. I started writing and that song came into my head. For the lyrics are good today. The end is near, the end of ZIRP, that is. And of course I’ll state my case that the Fed should not hike rates, but that’s not going to stop them. Kansas greets me this morning with their song: Dust In The Wind. Kind of a sad song, but one that always reminds me of a trip to Cancun many years ago.

The end is also near with regards to my writing the Pfennig, as I start my winter vacation tomorrow, and will be back on the Monday after Christmas. I’m actually thinking of working in the office for a couple days that week, it all depends on how I’m feeling of course! But the major “end” is for zero interest rates here in the U.S. as the Fed will announce this afternoon that they are raising interest rates 25 Basis Points. Should they hike rates at this time? Well, that’s a resounding NO if you ask me! You’ve heard me harp about the economic data not being strong enough to warrant a rate hike, so I thought I would let my friend, Jeff Opdyke, give you his two-cents of why he thinks the Fed is barking up the wrong tree here. Jeff is a former writer for the WSJ, where he wrote an article about me several years ago. He’s now with the Sovereign Society, so let’s listen in on what Jeff has to say this morning.

“Despite the pabulum you hear from Keynesian cheerleaders desperate for a win, or the poorly reported economic data presented to you as proof of American economic vigor, the sad truth is that the U.S. economy is not a bastion of strength, I don’t care who claims otherwise.

As Americans, we don’t want to hear bad news. We are culturally biased against reality when reality contravenes what we wish to believe. But there are some indisputable facts to consider:

One in five working-class Americans is either unemployed, underemployed or out of the job market completely (a figure worse than Europe). The McJobs we are creating do not support a middle-class life, helping explain why new research out last week shows that most Americans are, for the first time in modern history, no longer a member of our much-vaunted middle class. Corporate earnings and the U.S. manufacturing sector are both in recession. Income growth has gone basically nowhere for a generation or longer.” – Jeff Opdyke

But. Nothing’s going to stop us now, I hear Janet Yellen singing along with her fellow fed members. I’m sure the members of the Jefferson Starship won’t mind Janet borrowing their song! I read a piece by an economist yesterday, that talked about how most observers that don’t think the U.S. economy can handle a rate hike right now might be wrong, and that in the end, the Fed will be able to hike rates a couple of more times in 2016, and inflation begins to really take off after spending a couple of years being non-existent. Well, I as an American citizen sure hope this economist is correct, and that we don’t experience, what I think we will experience (a recession which brings us back to QE4) after the rate hike. But me, being me, am not going to be easily swayed, here, so all I can say is fasten your seat belt ladies and gentlemen, keep your arms and legs inside at all times during the ride, for this is going to be some kind of ride!

Well, the positive day for the currencies (most of them) kind of got washed out as the day went along, and more and more traders realized what was ahead of them. (a rate hike, and most likely more dollar strength) The euro lost the $1.10 handle, and the Aussie dollar (A$) lost the 72-cents handle, and kiwi backed away from the 68-cent handle. But the Russian ruble turned around on the day, as the price of Oil rose during the day. Gold struggled to hold its small gains, and the overall feeling in the markets was just one of blah. That’s not unusual for this time of the year. A couple of months back I wrote about how I thought the Fed should bypass the rate hike in December, because the volumes are low, the trading is thin, and the trading desks are pared down with vacationers already heading out the door for Christmas.

Speaking of the Russia ruble. I was reading a report on the Bloomie yesterday on the ruble, and how When the ruble tumbled a year or so ago and first hit 70, then 80 then 90, the Central Bank of Russia had to jump quickly to hike rates aggressively to defend the currency. Eventually calmer heads prevailed, and the ruble rebounded to the 65 level. But now that the ruble has touched 70 again, no one is panicking this time. And that’s because the price of Oil has dropped so much in the past year. The folks at Merrill Lynch, Bank of America say that with Oil around $35, the fiscal gap for Russia is going to be too great, and that the ruble would need to fall to 94 for Russia to keep the fiscal gap in check.

There are reports that quite a few observers believe that the price of Oil will rebound to $50 in 2016, at which the ruble could remain between $65 and $70 for numbers to work out for the Government. The problem with counting on the price of Oil to recover is that it just might not! A couple of months ago, I wrote about how I thought that the ruble would be range bound until the sanctions were loosened, and I still believe that. I really don’t see the Russian Gov’t allowing the ruble to slide to 94, or anywhere near that level of weakness. But then that’s just my opinion, and I could be wrong!

This morning, it’s a case of no one wanting to go out on a limb with the currencies and metals, not with the FOMC announcement this afternoon. For the most part, the currencies are down but barely, so it would be more precise to say they are flat on the day, with a downward bias. There are exceptions, like always. Today, on the downside it’s the Russian ruble, and on the upside it’s the Indian rupee. I’ve already spent time talking about the ruble, so let’s head to New Delhi and see what’s up!

Well, about the only thing going on here, is a feeling that the selling of the rupee in recent trading sessions was overdone, and that the Fed’s rate hike of 25 Basis points will not be the “end of the world as we know it” for India. Geesh, they could have just asked me a couple of months ago, and I would have told them all that, so that the rupee didn’t have to get whacked over and over again.

Gold is up a couple of bucks as I write. Talk about an asset that will be happy to see 2015 go away, and that’s Gold. Every rally was met with a whacking, but yet the physical demand for the metal is strong. Very strong! The supply/ demand and price discovery that should happen in a free trading marketplace just doesn’t apply here, and it’s so sad, because what we have instead just doesn’t meet the expectations of Gold holders.

I told you yesterday, that the industrial metals of Platinum and Palladium have been stealth-like with their recent rallies, and they continued yesterday and in the overnight markets. Party quietly, is what these two are doing right now. And it’s about time they got off their duffs! HA!

Well, one more thought on the Fed’s FOMC rate hike announcement this afternoon. I was doing some looking into old stuff yesterday, and came across some notes on previous rate hike cycles that began in 1994, 1999, and 2004, and guess what happened to the dollar in those beginning rate cycles? The dollar lost ground! Because what you had with these three rate hike cycles is the fact that the markets had already priced in the rate hikes. Well, last I checked 78% of this rate hike is priced in. So, we could very well see dollar weakness from the announcement this afternoon. I still think that dollar strength is the call for the day, but history says otherwise. And you know me and history.

The U.S. Data Cupboard yesterday has the stupid CPI print, and imagine that. No inflation month to month in November, and year on year, a tick upward to 0.5%… those that don’t use food and energy daily, like to take those two out of the data, and when you do that CPI is 0.2% month to month, and 2.0% year on year. So, there! If you just keep taking stuff out, the Fed has achieved their 2% inflation! I shake my head in disgust and disbelief that it’s come to this.

The Empire Manufacturing for the NY region printed another negative number for December of -4.59, but that was actually an improvement from November’s negative -10.74. But still negative, which shines a light on the recession in manufacturing that Jeff talked about earlier this morning.

Today’s Data Cupboard is chock-full-o-data. Upfront we have two of Chuck’s faves, Industrial Production (IP) and Capacity Utilization (CAPU) for November. Don’t look for any miracles here, these two will disappoint once again in November. In addition, we’ll also see the November prints for Housing Starts and Building Permits. And finally, the Markit U.S. Manufacturing PMI, which is a manufacturing index, like the national ISM one we focus on.

To recap. Well, the day is finally here. The day that interest rates will be hiked for the first time in nearly a decade! Chuck still doesn’t think the economic data warrants a rate hike at this time, but there’s no stopping the Fed now! The currencies are basically flat this morning along with Gold. Platinum and Palladium continue their stealth-like rallies, partying quietly. Chuck highlights the problems for the Russian ruble, and takes a quick jaunt to New Delhi, only to find out that the rupee rally is all about the previous whackings being overdone.

For What It’s Worth. This is a fun one today, which is fitting for me getting out the door. I found it the Bloomberg.. And it’s about Peru and their currency. So, you know this is going to be fun. let’s check it out together.

“Peruvians created their first currency in the mid-1800’s and it was called the Sol (Spanish for sun), that currency was followed by the “Sol de oro” (the sun of gold), and it was called that until 1985, when they renamed the currency the Inti, which was indigenous word for, you guess it, the sun. But when hyperinflation wiped out the value of the inti a few years later, it was time for another sun. The new currency was the “Nuevo sol” it was called as if to say, “don’t confuse this new sun with all those old suns” HA!

But 24 years later, the currency is still called the Nuevo Sol. Well, not any longer. After 24 years, the Peruvians have dropped the “Nuevo” and just call their currency the sol, again. You might ask what took them so long to drop the “Nuevo”? Well, besides the cost of replacing the old currency with a new currency, the country just never got around to going through the formalization of changing the name. No one has called it the “Nuevo Sol” for a long time. But with contracts being written using the Old, old name and the “Nuevo” name, there were problems, so the change had to be made. And so the people who are sun-obsessed now get a currency with a fitting name.

Before We Head To The Big Finish Today, I wanted to share this with you. Not that this is a currency that is actively traded or liquid or anything like that, but the country of Sudan, announced yesterday that they had dropped their peg to the dollar that had the currency at 2.96, and allowed market forces to drive the currency down 84% to 18.5 per dollar. YIKES! This is first hand illustration of what happens when a third world country pegs their currency to the dollar, and the dollar strengthens, while the third world country experiences a slow down like the rest of the global economies.

Currencies today 12/16/15. American Style: A$ .7195, kiwi .6750, C$ .7270, euro 1.0920, sterling 1.5005, Swiss $1.009, . European Style: rand 15.0475, krone 8.7680, SEK 8.50, forint 289.70, zloty 3.9575, koruna 24.7455, RUB 70.18, yen 121.80, sing 1.4095, HKD 7.7500, INR 66.72, China 6.4626, pesos 17.11, BRL 3.9295, Dollar Index 98.24, Oil $37.16, 10-year 2.27%, Silver $13.87, Platinum $864.90, Palladium $567.65, and Gold. $1,064.85

That’s it for today, and for me until after Christmas! It’s time to get out shopping! Man, I almost didn’t answer the bell this morning. I’m dead tired, and ready to go back to sleep! The next three days will be the birthdays of: Jen Mclean tomorrow, Joann Perry Friday, and Ty Keough on Saturday. WOW. Happy Birthday to all. I’ve worked with Jen since the mid-90’s. it’s been a long run, eh Jen? It’s a good thing she remains young! Well, it’s that time of year, when Chuck channels his inner kid at Christmas. I tell you all this every year, but let me be clear, here, I celebrate Christmas, and in doing so, I talk about Christmas, in hopes that it doesn’t offend anyone that doesn’t celebrate Christmas. I’m a Merry Christmas kind of guy, not that Happy Holidays stuff! I just received my December Review & Focus in the mail yesterday, and in it I always have a little saying that I’ll share with everyone here. May the light of faith, the warm of heart, and the love of family be your gifts this year. I’ve used that for several years now, and I can think of no better way to express those feelings. It’s beginning to look a lot like Christmas, toys in every store, But the prettiest sight to see is the holly on your own front door! Get the message? I sure hope so. Alrighty then, until after Christmas, I hope you have a Blessed Christmas, and today I hope you have a Wonderful Wednesday! Bye~

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