Is Demand Destruction In Our Future?

A Pfennig For Your Thoughts
 
June 1, 2022
 
* Dollar rebounds on Monday… 
* Gold & Silver start June with rallies! 
 
Good Day… And a Wonderful Wednesday to you! And Welcome to June! Yesterday, here in the middle of the country, the day started out ugly, but by noon it was another Chamber of Commerce day here! But rain has moved in, and the temps will be cooler the rest of this week… I sat outside enjoying the day yesterday, and finished my last book. Bob Dylan greets me this morning with his hit song: Knocking On Heaven’s Door…
 
Pfennig tradition calls for this: June is busting out all over, all over the meadows and the hill, buds are bustin’ out of bushels and the rompin’ river pushes every little wheel that wheels besudes a mill…. Ahhh, a little Rogers & Hamerstein… to start our day and month! 
 
Well, our first day back from the holiday weekend, was not a good one for the currencies and metals. We said good bye to May, and it appeared that we are going to be saying good bye to the currency rally, dollar selling, and the comeback for Gold & Silver. But, May too started out looking like that, and we know that the dollar ended up having 3 straight weeks of losses… So, we could very we’ll get things turned around again… I sure hope it doesn’t take its time about doing that! 
 
The BBDXY had already gained 4 index points by the time I was writing yesterday morning, and continued to rally throughout the day ending up at 1,226.84, up 5 index points on the day… The euro gave up about ¼ of a cent, and even the Russian ruble, which had been on a tear in May, gave back some of those gains yesterday. Gold & Silver started the day down, and never got off the mat yesterday. Gold lost $16.70, and Silver lost 43-cents! Gold finished the day at $1,838.10, and Silver at $21.62… The price of Oil came back into the hemisphere yesterday and closed the day down $3 trading with a $115 handle… And Bonds, have begun to rise again, with the 10-year ending yesterday at 2.86%
 
It’s time to start hearing the talk about how the Fed/ Cabal/ Cartel will hike rates again this month… I’m going to go out on a limb here and say that this next 50 BP rate hike will be their last one… They may say that they are more than ready to hike again the following month, but… I just don’t see the Fed Heads having the conviction to watch what they have created (The credit economy) go down the drain, with rate hikes, besides they will be able to point to the PCE, which we talked about yesterday, and say that inflation is already falling, and there is no need to keep hiking rates… Of course they’ll leave the door open in case inflation comes back, which it will if you ask me, but by then they’ll be so far behind inflation that they’ll never catch up, so they might as well go back to the money printing tree, and start printing money again, for stimmy checks, and other bailouts… And the people will rejoice! They will hail the Fed Heads as their saviors, because they got a check for $1,000 in the mail… And for a moment, they’ll forget that they just paid $10 for a gallon of gas… 
 
Oh, did I forget to mention that we are growing closer to the election period, and you wouldn’t want to be up for re-election, without stimmy checks in people’s pockets! 
 
In the overnight markets last night… Strange things have happened, in that the dollar continued to hold its gains, but the Commodity Currencies have gained VS the dollar, sans the ruble… And Gold is up $8, while Silver is up 43-cents in the early trading today. I believe there could be some short covering going on, as we start the new month… The price of Oil has recovered $2 of its loss in yesterday’s trading, and Bonds are stuck in the mud at 2.85%, this morning…  
 
OK, well I watched and listened to an interview with Nomi Prins, who is a big hot in the arena of analyst, authors, speakers, and economists… Last year she wrote a book telling us how there was a huge collapse of the stock market on the way… But she has reconsidered and now thinks that that the Fed will avoid a collapse of the stock market, and thinks like I do that they will go back to the well, and print money again… I just finished an interview with Dennis Miller for his letter: Miller On The Money, yesterday, and I’ll give you a spoiler alert, on something I talked about in the letter… It’s called ‘Demand destruction’ is the term economists use. It describes the self-correcting phenomenon: how high prices cure high prices…and why inflation will take care of itself, if it is left alone. As prices rise, people can’t afford to buy so much. Because they are poorer. So, prices fall simply because there is less demand for goods and services. Less is made. Less is consumed. Prices fall. And less energy is used. ”  
 
I borrowed that description from Bill Bonner’s letter, and I am telling you this now so you will hear me later… this is not going to work! The higher prices we are seeing today, will never return to what they were before… Instead higher prices we see now will only continue to go higher… This won’t happen overnight, folks, but like Chinese water torture, Prices will gradually go higher and higher until you say “uncle”… 
 
OK… moving on to something else… Bill Bonner talked about turbine wind mills yesterday in his letter, and he is very leery of them being able to replace fossil fuels… And I agree… Let’s see… what happens when the wind doesn’t blow? Don’t we need a continual flow of energy to get through our day, we certainly can’t stop every time the wind decides not blow… Or the same can be said about solar panels… What happens when the sun doesn’t shine? Shoot Rudy, we, here in the Middle of the Country, just had the chilliest, wettest spring I can recall ever experiencing, There were multiples of days when we never saw the sun… I’m just pointing out the numbskullness of the Green Deal, and all the expense of money we don’t have to spend, that it will cost… 
 
I can’t say that I’ve experienced any food shortages yet… Higher prices, you bet! Of course, I have no use for baby formula, and that was the short du jour this month… Remember during the ill-advised economic shutdown, the toilet paper shortage? Well, if we didn’t have people hording TP at the time, the shortage would have been lessened… And hand sanitizer, and oh well, you get the idea here… 
 
So, has the Russian ruble seen the best of its days? It certainly appears that way, given that on 5/25 the ruble was trading with a 56 handle, and since then, with nothing changing,, countries buying Russian Oil still must pay for it in rubles or Gold… But there’s something in the air that’s telling me that the ruble has seen its best days… There was this surge in the currency, and it became the currency du jour, and therefore everyone had to own some rubles, and the surge got stronger, but then the surge ended, and the ruble has lost ground every trading session since 5/25… Interest rates in Russia are still higher than the rest of the world, but with fundamentals still on the back burner, those higher interest rates aren’t helping the ruble right now… 
 
But the ruble remains an “oil play”… So if you are of the opinion that the price of Oil will stay high or even go higher, then this is your currency to own… At least you get a nice chunk of rubles added to your holding every 3 months! 
 
I have the same concern with the British pound sterling… aka ‘the pound”, or “cable”… after falling to a 1.24 handle a week or so ago, the pound has rallied, and there’s nothing there to tell you why it has rallied, and I’m always quite suspicious of an asset that rises and there’s no reason for it to rise… Of course that conversation could be about cryptocurrencies, NFT’s, and any other Fad that’s got people’s attention. 
 
Well, it’s June 1st, and the Fed Heads will begin, supposedly, their massive Quantitative Tightening, I have to think that this is where the cheese begins to bind for the economy, and the dollar,,, no buyers for the Treasury auctions, should make for interesting times ahead… 
 
The U.S. Data Cupboard today will have the ISM Manufacturing Index for May. I believe we’ll see this data continue to weaken… We’ll also see the Job Openings, and the Job Quits… I’m fascinated by the Jobs Quits data each month, seeing that at least 4.3 Million people quit their jobs, each month.. You know, after a few months those Job Quits add up, eh? I don’t see how our economy can recover while we’re experiencing “the Great Resignation”… 
 
Can you blame these people that have thrown their hands in the air and say, “take this job and shove it”? Their wages for toiling at a job that takes them away from their family, etc. can’t keep up with inflation, and they are losing ground financially with every passing day… 
 
To recap… The dollar rebounded on Monday, but in the overnight markets the Commodity Currencies, sans rubles, have pushed back against the dollar, as we start a new month, with Gold & Silver on the rally tracks, and Oil pushing the envelope of higher prices… 
 
For What It’s Worth… Well, remember a week or so ago, when I told you about the riots in Sri Lanka over rising prices, and how that could come to America? Well, if the people of the island nation were upset with high food and energy prices, before, they’ll probably ready to blow a gasket over the latest inflation report from Sri Lanka, and that can be found here: https://www.bnnbloomberg.ca/sri-lanka-s-inflation-surges-to-record-39-1-in-may-1.1772666
 
Or, here’s your snippet: “Sri Lanka’s inflation surged to a new record in May driven by costlier food and fuels, even as the island nation struggles to find a way out of its worst economic crisis.
 
Consumer prices in the capital Colombo rose 39.1% from a year earlier, the Department of Census and Statistics said in a statement Tuesday. That compares with a 35% gain predicted in a Bloomberg survey of economists and 29.8% the previous month.
 
The Central Bank of Sri Lanka, which this month left borrowing costs steady while letting previous increases to filter through the economy, had predicted price gains to touch 40% amid a shortage of essentials in the absence of dollars to pay for imports.
 
A sharp fall in the Sri Lankan rupee and heightened global uncertainty stoked prices. After having lost more than 40% following a devaluation in March, its currency has slowed its decline against the dollar since mid-May. 
 
The country battling its worst economic crisis since independence needs $4 billion this year in emergency funds but a deal with the International Monetary Fund remains elusive. Securing an aid from the IMF would require structural reforms such as raising taxes and pruning expenditure, steps that could further aggravate pain for its citizens.”
 
Chuck again… We used to have a saying on the margin desk, when a margin account holder would be under the required percentage of equity in their account… We used to say, “if you loved “x” stock at $80, you’ll really love it $40″…   I don’t know why I just told you that, something in the Sri Lanka story triggered my memory back to when I used to run the margin desk at a regional brokerage house.. 
 
Market prices 6/1/2022: American Style: A$ .7228, kiwi .6537, C$ .7926, euro 1.0726, sterling 1.2572, Swiss $1.0416, European Style: rand 15.5090, krone 9.3530, SEK 9.7582, forint 366.46, zloty 4.2780, koruna 23.0642, RUB 63.26, yen 129.28, sing 1.3701, HKD 7.8461, INR 77.52, China 6.6686, peso 19.62, BRL 4.7422, BBDXY 1,226.97, Dollar Index 101.87, Oil $116.65, 10-year 2.85%, Silver $21.90, Platinum $997.00, Palladium $2,017.00, Copper $4.32, and Gold… $1,846.06
 
That’s it for today, and this week… I apologize for the tardiness of the letter today… I couldn’t sleep last night, and didn’t get to sleep until the middle of the night, and just couldn’t answer the bell this morning… I have no idea what was keeping me awake… Drove me nuts! Cardinals blow a lead in the 8th, but win it in the 10th, last night… Day game today, but they’ll have to dodge the raindrops to play 9… The Cardinals will head to Chicago tomorrow, to play the Cubs… A BIG rivalry… And Happy Birthday, to Jerry McCoy, daughter dawn’s husband… Chilliwack takes us to the finish line today with their great song: Fly By Night…  I hope you have a Wonderful Wednesday and a fun rest of the week… I’ll be getting scanned tomorrow bright and early, and then I’ll get to my fun weekend! Please Be Good To Yourself! 
 
 
Chuck Butler
Creator & Editor of:
A Pfennig For Your Thoughts