The Price Of Oil Bumps Higher.

* Dollar strength returns.
* Holiday spending soars!.
* FT & Barron’s diss Gold.
* An Update on Italian Banks!.

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

Good Day. And a Wonderful Wednesday to you! Heeeeee’sssss Baaaaaaaccccckkkk! (spell check sure doesn’t like those two words! HA) Well, here I am.. rock you like a hurricane! Well, sort of. Seems I’ve contracted a killer cold, and at times I think I’m going to cough up a lung, but over the counter medicine combats it a bit, so I’ll remain at home to do my coughing, and write from here. I’ve been feeling pretty good lately, sleep is still fleeting, and my back just won’t loosen up, but other than that, things are good. So, how’d your Christmas go? Mine was fun, the kids were all here with my grandkids, (probably where I got this cold, eh?). Uncle Alex bought the boys their favorite gifts again this year. Last year it was light sabers, this year it was a remote control robot from Star Wars. Neil Young greets me this morning with his song: After the Gold Rush. Hmmm, I have to think that this song came up for a reason today.

Well, the soft underbelly of the dollar in the past few trading sessions is giving way to dollar strength today. Bloomberg says that “trading has resumed” , so I guess that’s official, wink, wink, and that things are getting back to normal on trading desks.. I have to think that’s a bunch of dookie, and that “the boys and girls” are still in the Hamptons, or Bahamas, or wherever, and things won’t get back to normal until next week. But, nevertheless, we have dollar strength today, something that continues to defy logic, in my humble opinion.

Why do you say that, Chuck? The Fed just hiked rates, and promised to hike them 3 more times next year, what else does the dollar need other than higher interest rates to attract investors? Ahhh, grasshopper. come, sit, and let me tell you a tale of what those higher interest rates are going to do to an economy that has acted like an old combustible engine that’s on its last leg, spittin’ and backfiring its way to the junk yard. Sure, every now that then it finds life and runs stronger, only to find that piston that’s not firing, and the spittin’ and backfiring returns. There are two thoughts I have on higher interest rates that have been promised for three years now, and we’ve gotten 50 Basis Points of rate hikes total.

The first thought is that, all we’ve heard about for the past few years, going back to 2009, when the first round of Quantitative Easing (QE) was implemented and that was that the Fed wanted inflation to return to normal and reach a target of 2%. The wild ideas from economists like Paul Krugman, wanted inflation to run 5% or more. But you get the picture, inflation was a key ingredient to turning the economy around. So, what does a Central Bank do, when inflation begins to be a problem? That’s right, they raise interest rates to stomp out the inflation. So, how do you reconcile this one? You want stronger inflation, but you are hiking rates, which stomps out inflation?

The second thought is you have this old junk car as the economy, and you decide to add a trailer hitch to it and pull a 30-foot camper. That’s going to slow down the junk car, but then you add a boat to your trailering, and shoot, let’s throw on some bicycles, motor scooters, and what have you, so that you look like a band of gypsies going down the road (there’s nothing wrong with that!) but the old junk car you’re driving just can’t generate enough power to pull all that weight, and gives out and you end up on the side of the road, broken down, waiting for AAA to come and rescue you. The economy is the junk car, and the interest rates are the items the junk car has had hitched to it.

I have a lot of respect for James Rickards, and although we don’t always agree with everything he says, most times he’s bang on with my view. And Rickards is now saying that the President-Elect’s plans to stimulate the economy are not going to pan out, and then you have potential of rate hikes, and that’s going to cause a real problem for the economy. I wonder what changed his mind towards the “planned stimulus” Rickards and Chuck were on the same page with the stimulus thought, and helicopter money, and so on. Oh well, things change, and we change our minds, right? But I’m still of the opinion that the President-Elect is going to attempt to simulate the economy with some debt increasing plan.

Alrighty then, that’s enough of that talk! The price of Oil has a $54 handle this morning, up 25-cents in the past 24-hours. I did some reading regarding Oil while on vacation, and came to the idea that given the rise in the price of Oil, the shale producers here in the U.S. can see a light, and some are able to get back to their fracking, because their process is profitable again. And that defeats the purpose of production freezing, but does keep the shale producers out of debtor’s jail. Now, there’s a term that’s no longer used, eh? Debtor’s Jail. I wonder how many dear readers remember that people actually went to jail for not being able to pay debts. ( I guess it still exists in a form when things like child support are not paid, etc.)

Come on Chuck, move along here, no reason to drag stuff out! Well, OK. But I loved talking about that stuff in the past! The Russian ruble continues to be tied to the price of Oil, which means with the price of Oil well bid these days, that the ruble too is well bid. Chris talked about it yesterday and how it has a nice return VS the dollar this year, which most currencies cannot say, and how as a speculative investment for your portfolio, it also adds a strong interest rate. But remember, I’ve always told you that the ruble is an Emerging Market asset, and therefore should only be purchased in the “speculative portion” of your investment portfolio.

I also did a ton of reading about Italian Banks. I’m really concerned about what’s going on here in Italy. You’ve got Italian officials saying one thing like this that was in the U.K. Telegraph: “A solution is now in sight. I really believe Italian banks are turning the corner,” said Lorenzo Codogno, former chief economist of the Italian treasury and now at LC Macro Advisors.”

And the new Prime Minister chimed in with this from the Economist, “Paolo Gentiloni, Italy’s new prime minister, said that “today represents a turning-point [for the bank] and a reassurance for its depositors and its future.” What they are talking about was the approval about 10 days ago by the Italian Gov’t to inject 20 Billion euros in new public debt, to the banking system.

20 Billion euros? You’ve got to be kidding me! I kid you not Chuck, you’re my favorite goat! But seriously. Just for the record, Italy’s banks have a combined 360 Billion euros worth of nonperforming loans that are on the books! (I’m thinking there are some that not on the books, aren’t you thinking the same thing?) So, what the heck is 20 Billion euros going to do, no matter how you stretch it, it’s not going to fill that gaping hole! So, to me, anyone thinking that the 20 Billion euros package is going to be savior, and cure all that ills Italian Banks, has been hitting the peppermint schnapps a little too much.

So the pressure that the euro is receiving from dollar strength, and the Italian banking problem has been enough to push the euro below 1.05, but amazingly to me, that is, the single unit has held above parity while, what seems like, the whole world is crashing down on it. And now the heat on a France exit from the E.U. is heating up. the leader of the party that wants to leave the E.U. and NATO, the far-right National Front, led by Marine Le Pen, has stated that “FREXIT will be a part of my policy”. The French Presidential Elections will be held in 2017, so we’ll have all that drama, as will the euro, to deal with next year. UGH!

The Aussie dollar (A$) and kiwi have sure had their problems with the U.S. dollar strength, which is interesting to me, in that the A$ and kiwi still enjoy positive interest rate differentials to the dollar, and will continue to do so, even IF the Fed hikes rates 3 times in 2017. I really don’t believe that either S. Pacific Central Bank will entertain further rate cuts next year, as both have basically said that the rate cut cycle has ended. But when the dollar has the conn, and has climbed to the top of the hill, there’s not much that can stand its way, or knock it off the hill. And that’s what we have going on right now. And I still don’t see how traders and investors can buy dollars based on a “promise” that’s been broken two previous years. But then that’s just me. I’m from Missouri, I have to be shown!

Well, the Publications are ganging up on Gold these days. Ed Steer’s letter highlighted an article this morning that talked about how The Financial Times and Barron’s were touting the death of Gold. Here’s Barron’s: “Gold is struggling. The election of Donald J. Trump as U.S. president was supposed to increase market volatility and push investors to safe assets. Volatility has risen, but investor sentiment has shifted toward hopes of better economic growth through fiscal stimulus, tax breaks, and infrastructure investing.”

And here’s the Financial Times: “Lex” gave this morbid headline “Gold: For Whom the Bell Tolls”. Peter Atwater, not even a gold bug, caught the sentiment, announcing “This death of gold story suggests a major low is near.”

I didn’t tell you these things to scare you away from Gold.. I told you these things to compare them to when a sports team owner gives his manager a vote of confidence, and then turns around within days and fires the manager. It’s an opposite direction thing, but you get the picture. As Ed Steer opines this morning, “When the pall bearers and grave diggers start dancing on gold’s grave, it’s usually a good time to buy.”

Gold gained $4.80 yesterday, and is flat as pancake (Head East) this morning. I really thought that my currency of the month article on Gold was going to print the Sunday before Christmas, but when the BIG Boss Frank Trotter submits an article it gets pushed to the front of the line immediately, as it should, I must add! So, I guess it will print this Sunday. I really think that when you see it in your email box that you’ll want to read it. I’m just saying. Oh, and wasn’t that Sunday Pfennig video with Frank and Doug Casey, pretty cool?

The U.S. Data Cupboard continues to spit out 3rd Tier data today. Well, it seems that the holiday sales this year were off the charts! Judging from the number of presents that were brought into the house and opened by everyone, I would say I agree with that call! I read where Holiday Sales may have risen by nearly 5% this year, the largest gain since 2005! WOW! Of course, you know me, I want to know how those gifts were purchased. And, yes, you can call me Scrooge, because I won’t just take the headline data and swallow it hook, line and sinker. So, next month, we’ll see the Consumer Credit (read debt) report for December. Should be a doozy, don’t you think? So, mark this down, and then we’ll compare it next month.

Before I head to the Big Finish today, I wanted to mention something that I saw on the newswires that caught my eye. Did you hear that Cuba offered to pay their debt of $270 Million to the Czech Republic in rum? Wait, what? Are we heading back to a time when we bartered commodities, livestock, etc. in the terms of trade? Just another step toward a completely different financial system with Gold as its base, in my humble opinion, which could be wrong!

To recap. The dollar is back to kicking tail and taking names later this morning, as things begin to get back to normal on trading desks. It’s all about interest rate hikes in the U.S. folks, nothing more, nothing less, and somehow we’ve got to either see the rate hikes, or have them bypassed to make a direction trade that’s based on something besides “a promise”. The price of Oil bumps up over $54 this morning, and the Russian ruble is about the only currency with a gain VS the dollar today. Cuba wants to pay their debts with rum, and Gold is flat as a pancake this morning.

For What It’s Worth. I have a different, which I’ll call a special treat for you this morning, and no I didn’t compose another poem! HA! I’ll just get right to it.. It’s all me today folks.

I did a lot of reading last week while on vacation. I did a lot of thinking about something that is near and dear to my heart with regards to investing. And that is this little thing called “Price Discovery”. Here’s the definition of Price Discovery. “Price discovery refers to the act of determining the proper price of a security, commodity, or good or service by studying market supply and demand and other factors associated with transactions.”

Nowhere in that definition is there any mention of “paper trades”. or better put, trades that have no bearing whatsoever with market supply & demand. This is really something that I hope one day, before I breathe my last breath on earth, that returns in earnest to investments, like stocks, bonds, commodities and currencies. Well, to highlight Price Discovery, I came across an old story that the famous Art Cashin told many years ago, and was recently preprinted by Danielle DiMartino Booth, in her newsletter. I hope you enjoy this story on Price Discovery.

The two main characters of this timeless tale are Charles Lewis Tiffany and John Pierpont Morgan.

Being the astute jeweler that he was, Mr. Tiffany knew that Mr. Morgan had an acute affinity for diamond stickpins. One day, Tiffany came across a particularly unusual and extraordinarily beautiful stickpin. As was the custom of the day, he sent a man around to Morgan’s office with the stickpin elegantly wrapped in a robin’s egg blue gift box with the following note:
“My dear Mr. Morgan. Knowing your exceptional taste in stickpins, I have sent this rare and exquisite piece for your consideration. Due to its rarity, it is priced at $5,000. If you choose to accept it, please send a man to my offices tomorrow with your check for $5,000. If you choose not to accept, you may send your man back with the pin.”

The next day, the Morgan man arrived at Tiffany’s with the same box in new wrapping and a different envelope. In that envelope was a note which read:
“Dear Mr. Tiffany. The pin is truly magnificent. The price of $5,000 may be a bit rich. I have enclosed a check for $4,000. If you choose to accept, send my man back with the box. If not, send back the check and he will leave the box with you.”

Tiffany stared at the check for several minutes. It was indeed a great deal of money. Yet he was sure the pin was worth $5,000. Finally, he said to the man: “You may return the check to Mr. Morgan. My price was firm.”
And so, the man took the check and placed the gift-wrapped box on Tiffany’s desk. Tiffany sat for a minute thinking of the check he had returned. Then he unwrapped the box to remove the stickpin.

When he opened the box he found – not the stickpin – but rather a check from Morgan for $5,000 and a note with a single sentence – “JUST CHECKING THE PRICE.”

Chuck again. Now THAT’s Price Discovery! What a great story, eh?

Currencies today 12/28/16. American Style: A$ .7180, kiwi .6915, C$ .7368, euro 1.0430, sterling 1.2230, Swiss $.9727, . European Style: rand 13.9034, krone 8.7095, SEK 9.1978, forint 296.18, zloty 4.2245, koruna 26.9127, RUB 60.59, yen 117.20, sing 1.4517, HKD 7.7575, INR 68.18, China 6.9678, peso 20.78, BRL 3.2749, Dollar Index 103.23, Oil $54.21, 10-year 2.56%, Silver $15.92, Platinum $902.13, Palladium $670.24, Gold $1,139.80 and SGE Gold . $1,167.63

That’s it for today. We had to take our Christmas tree down the day after Christmas this year, because it had dried out completely. We’ve never had a tree do that before, very strange, But the house is getting dressed down and it’s so depressing for me to watch.. Monday was Kathy’s birthday. We celebrated by going out to dinner. I can’t tell you how old she is, but she’s two years younger than me, and on my next birthday I’ll be, no wait! If I tell you that , then you’ll know her age, and she would be as mad as wet hen if I told you that, for she made me promise to stop talking about her a couple of years ago. A BIG Thank You to all who sent along Christmas Wishes to me last week. I truly appreciate each and every one of them! Well, can you believe 2016 is nearly over? Another year gone. Good bye 2016, well, not yet, but it’s coming! Percy Sledge takes us to the finish line today with his iconic love song, When A Man Loves A Woman. There have been remakes of that song, but no remake comes close to the original by Percy Sledge.. And with that, it’s time to get this out the door, and on its way to you! I hope you have a Wonderful Wednesday, and Be Good To Yourself!

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