The Price Of Oil Briefly Falls Below $30!

January 13, 2016 by

* China figures out how to not freak out the markets.
* PBOC deputy does his best Robert Rubin impression!
* A$ weakness does the heavy lifting for the RBA.
* Gold takes on a boat load of responsibilities!

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

Good day. And a Wonderful Wednesday to you! Well, a nice mellow song greets me this morning. Neil Young singing the title song of his fabulous album, After The Gold Rush. This album and the Harvest album are my two Neil Young fave albums. He’s had a very long career in music, eh? All the way back with Buffalo Springfield. WOW! His nickname is “Shakey”. His parents nicknamed him that after watching some home movies he made. pretty funny, eh?

What’ s not funny is the performance of the price of Oil. Although it has recovered nicely from its brief drop to a $29 handle overnight, it appears that eventually the price of Oil will drop below $30, as many have been predicting. But, as I said, the price of Oil rebounded from that brief low that took it below $30 for the first time since 2003. That’s 13 years ago, folks. It was the year I walked my darling daughter down the aisle, and it was the first year that the “guys trip to Spring Training” happened, and it was the year that the U.S. first invaded Iraq. Remember “shock and awe”? So, that gives us some feeling as to how long ago it was that the price of Oil last saw the underbelly of $30.

With the rebound taking place in the price of Oil, the Petrol Currencies are rallying, and this time, the ruble gets to participate too. Unfortunately, the rebound in the price of Oil isn’t enough to shake the rot off the vine of pound sterling. I talked on and on about pound sterling and the U.S. yesterday, so I won’t go there again, but just know that the U.S. economy is heading to recessionville, and there’s nothing the Bank of England (BOE) can do about it. And for over a decade now, hasn’t it pretty much been a case of whatever happens in the U.K. then shows up on our shores about 3-6 months later? I do believe it has.

The Chinese and the Peoples Bank of China (PBOC) think that they have figured out how to move the renminbi without freaking out the markets. The PBOC has opted for smaller moves this week, and those smaller moves when added up eventually make a big move, but, as smaller moves don’t really cause ripples in the water, so it took the PBOC a while, but they finally figured it out. The PBOC weakened the renminbi by the same 20 tick move that they appreciated the currency with the day before. And no one freaked out, there were no Chicken Littles running around, nor were there any stock market crashes, that would blame it all on the Chinese.

What’s really strange is that the offshore renminbi / yuan the CNH, has been appreciating, and the two currencies which should move in tandem, in my opinion, have seen the spread between the two widen. Hmmm.

There was also a print of the Trade Balance in China overnight, and this data was good and bad. The good was that exports grew, and the Trade Surplus grew in size to $60.1 Billion in December, VS $54.1 Billion in November. The forecast for this data was for the Trade Surplus to narrow to $51 Billion. I don’t think anyone thought that imports would collapse as they did, and that’s the bad news, for the domestic economy has really backed off from their purchases. On year on year measurements, Exports have fallen -1.4%, and Imports have fallen -7.6%…

And I really didn’t mean for this to be a “China letter” but it appears that it’s going to begin to look like that given what I have to say now. I read yesterday that a deputy of the Peoples Bank of China was quoted as saying that. “short selling the renminbi / yuan will not succeed.” Hmmm. Was that his impression of Robert Rubin? Ahhh, let’s take a trip back to the mid-90’s. the weak dollar trend had been in place since the Plaza Accord in 1985. That’s when finance ministers from around the world met at the Plaza Hotel in NYC, to discuss how the strong dollar was not helping the world, and that the U.S. debt had gotten too large to fundamentally support the strong dollar. (The U.S. Current Account Deficit to GDP ratio then was 2.5%, and everyone was scared!) Today it is 2.7%, but has averaged 4.5% for the last 10 years. Anyway. the finance ministers said the dollar would get weak, and it did, for the next 10 years. But in the mid-90’s along came Treasury Secretary, Robert Rubin, who began to put the fear of God in the currency traders shorting the dollar, by saying over and over again, that “A strong dollar is in the best interests of the U.S.” Traders began fearing that the U.S. would intervene, buying dollars, and thus cause the dollar shorts to lose large sums of money. The shorting of the dollar began to fade, and soon another strong dollar trend was in place. Now, skip ahead to today, and we have the world thinking they should short the renminbi / yuan, and we have the deputy of the PBOC come out and tell those that are shorting his currency that they won’t succeed. That’s right out of Robert Rubin’s book on putting the short traders in a corner! It remains to be seen if his Robert Rubin impression will have enough behind it to be as successful as Rubin did in the mid 90’s. The Deputy in the PBOC had better lather, rinse and repeat that line as often as he can, to keep the fear in traders’ minds, otherwise traders will eventually see through the threat as just words, and then take their frustrations for not seeing earlier, out on the renminbi.

The Aussie dollar (A$) bounced higher after falling below 70-cents yesterday, and is back above the figure this morning. I think the calming effect from the PBOC’s small moves has carried over to the A$. The Aussie Employment reports for December will print tonight (tomorrow for them!) and I believe that the recent momentum of these employment reports will continue, thus giving the A$ another lift or at least underpinning it for now. The Reserve Bank of Australia (RBA) Gov. Stevens, who received my award given to the best line from a Central Banker for 2015 when he told the markets to “Chill Out, enjoy the Christmas season, and come back next year and we’ll review monetary policy at that time”, has to be happy with the recent pressure on the A$, that’s work he won’t have to do with rate cuts!

The euro is weaker VS the dollar this morning. And I’m wondering why. The Eurozone members will begin to report on their respective country’s inflation for December, and the thoughts here are that after much time under water, that inflation will show an increase in December.. And isn’t that what the European Central Bank (ECB) says it wants? Well, looky there, for the first time in 3 years, Greece posted a positive inflation number for December of 0.4%… This is the first positive reading from Greece of inflation since February, 2013. So, what’ eating Gilbert Grape? What’s the problem here with the euro, it should be moving higher on the Greek inflation report. What’s that? Are you saying that Greece isn’t important in the whole scheme of things here? Now, just wait a minute there, partner! That’s got to be the craziest line I’ve ever heard, for Greece sure was important last year with their debt problems, and will be again in a year or two when they have to go through it all again.

Yesterday, I talked about the Baltic Dry Index and the Railway Shipping Index, both showing unbelievable drops in activity. the Baltic Dry Index posted another new all-time record low of 402 yesterday. So there’s been no recovery to speak of here. The Big Boss, Frank Trotter, sent me a link to a report from the Cass Freight Index, which measures the shipping being done by Trucks. And this isn’t good either! The Cass Freight Index measures Shipments and Expenditures, and in December both were just awful, with Shipments falling -3.7% , and Expenditures falling -5.2%, both on a year on year basis. the monthly comparisons VS November weren’t any better with falls of -4.9% and -2.7% respectively VS November. Now, you’re scratching your head right? How can this be, given how supposedly, online sales in the U.S. were record numbers, and that “stuff” had to be sent somehow!

Take the last train Recessionville, I’ll be waiting at the station, be there by 4:30 because I’ve made your reservation, don’t be slow, oh, no, no, no.

The U.S. Data Cupboard is still looking for something to print, and I told you yesterday that nothing of real meat will print until Friday’s December Retail Sales report. We will see the Monthly Budget Statement today for December, but that’s about it.

Well, just about all the gains Gold had booked in the first week of trading have been wiped out. And we’re back to square one.. It just kills me a little each day when I look at the Gold price and see what’s happening. Even when it’s gaining a couple of bucks, I just have that feeling that Gold’s reins are being pulled back, keeping it from really moving higher. Look folks, I’m a fundamentals guy, always was, always is, and always will be, for fundamentals are the only thing that make sense as to why as asset is moving one-way or another. And the dollar’s fundamentals are awful, just awful, there’s nothing that says the dollar rally should continue, but it does. And dollar strength is what is holding Gold in check, (along with other things) right now.

I have noticed a change in Gold’s characteristics. Gold used to be thought of as an inflation hedge, and protection in geopolitical turmoil. But the markets have placed more on Gold’s plate folks. Gold is a reflection on the value of the dollar, the pulse of the economy, it measures risk, the cost of capital, the state of financial markets, and other things that get hung on Gold.. it’s crazy folks! Can you imagine an asset that is responsible for all these things?

U.S. Treasury yields are back to falling lower again. The safe haven buying has really pushed yields lower here. So, where’s all the gloom and doom from the rate hike and the potential 4 more rate hikes (that won’t take place, I’m almost sure of that!)? I had a real estate person ask me the other day, as she thought I was a “banker” , what mortgage rates were. I had to inform her that I’m NOT a banker, and I don’t play one on TV, nor did I stay at a Holiday Inn Express last night, but. I did hear a radio advertisement before I left St. Louis telling people that they could still get rates with a 3 handle. Talk about crazy stuff! Oh, well. the flight to safety for the yen is over, at least something makes sense!

That’s right, last week, I really ripped into the yen traders that were pushing the price of yen higher because of safe haven stuff. And this week, it’s all unraveling for the yen buyers. I guess that’s what’s eating the euro too this week. And Gold. But Treasuries continue to rally..

To recap, the dollar is mixed again this morning, but the BIG News overnight was that the price of Oil fell below $30 briefly, for the first time since 2003! The price of Oil bounced off the low price and has rallied since, thus taking the petrol currencies along for ride, minus pound sterling. Even the Russian ruble gets to participate in the rally today of Oil producing countries! Gold is down $4, this morning, but has taken on all kinds of responsibilities in recent years, and the safe haven trades in the currencies and metals are getting unwound.. Just because the PBOC has figured out how to move the currency without freaking out the markets is no reason to back off the safe havens!

Before I head to the Big Finish today. I wanted to talk to you about a report that Jim Rickards sent out to his readers, of which I’m one, that highlights a currency move that could take place soon, and it’s an attack on the dollar, and not by the Chinese! I always have to push back from the table when I read things like this, because short term currency forecasting is a craps game. So. just for GM, I’ll have to push away from the table on this one too. I know, I know, I’ve always said that the dollar’s fundamentals don’t reflect on a strong currency, and it would get whacked, but by next Saturday? If you really want to know what he’s talking about, you’ll have to subscribe to his letter, and you can get there by going to www.agorafinancial.com

Currencies today 1/13/16.American Style: A$ .7020, kiwi .6550, C$ .7035, euro 1.0820, sterling 1.4420, Swiss $.9998, . European Style: rand 16.4545, krone 8.8320, SEK 8.5450, forint 291.35, zloty 4.0130, koruna 24.4555, RUB 75.98, yen 118.15, sing 1.4320, HKD 7.7590, INR 66.85, China 6.5630, pesos 17.82, BRL 3.9959, Dollar Index 99.24, Oil $31.25, 10-year 2.12%, Silver $13.83, Platinum $844.18, Palladium $486.40, and Gold. $1,080.97

That’s it for today. So, bye, bye, St. Louis Rams, drove my Chevy to the levy but the levy was dry, and good old boys were drinking whiskey and rye, singing this’ll be the day that I die. Well, the NFL announced yesterday that the spoiled rich kid that owns the Rams and I won’t mention his name, gets to move the team to LA. This is the second time the NFL hasn’t stopped an owner from taking a St. Louis football team west. It happened to us in 1989, and now again in 2016. I have a lot of “Rams gear”, I guess it all goes in the trash now. What a big spoiled rich kid, that cried and whined about how St. Louis couldn’t support 3 teams (Cardinals and Blues being the others), and then with all this spoiled, rich kid owner buddies, they said go ahead and move! Well, the “St. Louis Rams” won a Super Bowl, and played in another in their stay here! The LA Rams can’t say that! And probably won’t for many years. Oh well, there are other things to talk about today besides the Rams move. But none that’s as important to the St. Louis area and fans, of which my wife was not a fan of the team, so she’s happy to see them leave. But not happy that the boys in the family are not happy. OK, I’ll get out of your hair today, and somehow try to find this as a Wonderful Wednesday. I hope you do too!

Chuck Butler
Managing Director
EverBank Global Markets
Editor of A Pfennig For Your Thoughts
1-800-926-4922
https://www.everbank.com