US home sales plunge.

* US home sales plunge…
* 3rd quarter GDP adjusted lower .
* UK growth slows…
* Commodities steady sending gold drifting higher…

And Now, Today’s A Pfennig For Your Thoughts.

I’ll start out today’s Pfennig with more observations from Frank who I think is somewhere out in Colorado:

The days are getting longer already. At 10:48pm on Monday Central Time the long March to summer began. It’ll be a long time before the grass needs mowing or the tulips come up but it has all begun. Chuck would note that pitchers and catchers report a bit before the next solstice so he’s got that going for him. I’m still ready for some actionable winter. Skiing, snowshoeing and general hiking hold a prominent place on my appointment calendar over the next couple months. Where I am in the mountains right now there are forecasts of 10-20 inches of snow over the next couple days. If I was back at home I’d be starting to stretch for the long hours of shoveling ahead. Instead we have the wax out and ready for some deep snow in the morning. I just hope the weather forecasters are more accurate than economists!

Speaking of economic forecasts I am really trying to think of great ideas to put together an optimistic outlook for 2016. I’m not getting very far yet. I seem fixed on facts that suggest that there’s a little going on, but it’s weak and likely to head the other way in the next year or so. Can the train that’s low on fuel and carrying few passengers make a go of it or will the line be eliminated in the next round of budget cuts at the railroad? What would Dagney do?

There are so many sides to each economic number. Cheaper oil results in cheaper energy costs for consumers and businesses, and lower revenue for all the rippling activity around oil production that seems to be leading to a lot of layoffs. The strong US dollar allows the US to consume more cheaply since within our trade balance numbers we import more than we export. But then of course it’s harder for exporting business to compete. A one way stock market over the past 6 -7 years has made the Fed look like a champion by putting more paper gains in the pockets of holders and boosting consumer confidence. But then over 80% of the gains in the market since 2008 have gone to about 8% of the population. Let’s hope for a little trickle down.

Here’s hoping the snow gods are good to Frank this morning. And with the data released yesterday, his questions about the strength of this economic recovery are really spot on. Data released yesterday showed existing home prices posted their sharpest drop in five years last month with new government regulations being blamed for most of the drop. The National Association of Realtors said existing home sales plunged 10.5% in November to an annual rate of 4.76 million units. Economists had forecast an increase in sales to 5.35 million so the drop was a major surprise to the markets. New regulations aimed at simplifying home purchase paperwork was being blamed for some of the drop off as lenders and closing companies were hesitant to use the new paperwork – a possible sign that the drop-off will prove to be temporary, but this seems like a stretch to me. The median price of existing homes rose to $220,300 in November, a 6.3% increase from a year ago and these higher prices could definitely be one of the reasons for the drop in sales.

The other big piece of data released yesterday was the final revision to 3rd quarter GDP. As I wrote yesterday morning, economists expected a drop in the GDP figure to 1.9%, and the final figure did drop but not as much as expected. US GDP grew at 2% in the third quarter; right in between the initial estimates of 2.1% and the expected 1.9% revision. The 3rd quarter number was a substantial drop from 2nd quarter GDP which showed a brisk 3.9% growth rate and had some investors wondering if the 4th quarter would show a continued slowdown or possibly a rebound. Digging into the numbers a bit I found that inventories remained relatively high last quarter, a result of record increases during the first half of the year. These large inventories combined with consumer uncertainty about the future of interest rates could pose a real risk for 4th quarter GDP here in the US.

Finally, the Core PCE which is the Fed’s preferred inflation measure rose 1.4%, slightly more than the projected 1.3% increase. And consumer spending, which accounts for more than two thirds of US economic activity grew at .3% rate in the third quarter which was right on the estimates. (This figure was not supposed to be released until later this morning, but somehow got posted electronically overnight.) One bright spot of the report showed savings near three year highs – good for consumers but not so good for the economy/businesses who are wanting these consumers to spend some of those gas savings.

Today we have an absolute plethora of data releases, almost too many to write about! But the big numbers will be the personal Income and spending (we got the MOM spending figure a little early) and the durable goods number for November which is expected to show a drop of .6% after last month’s big 2.9% increase. And we will also get a reading of US consumer sentiment with the release of the U of Mich sentiment figures.

Something I missed writing about this week was the new Finance Minister appointed in Brazil, Nelson Barbosa. Pfennig readers know all about the political and economic crisis which has been gripping South America’s largest economy, and the appointment of the new finance minister only added to investor’s worries. The former Finance Minister, Joaquim Levy was a popular figure with investors with his focus on fiscal austerity and budget cutting but Mr. Barbosa has not been met with the same enthusiasm, and in fact his reception by investors has been harsh. Barbosa has suggested that he is amenable to granting subsidies to some industries and is seen as much less of a deficit hawk. Meanwhile the Brazilian economy is in a freefall bringing the currency down with it. Not good.

The dollar inched higher in what was very thin trading yesterday as many investors had the holidays on their minds instead of currency trading. It was also a holiday in Japan (the Emperor’s Birthday) which took a major chunk of volume out of the overnight markets. One of the largest movers this morning is the Pound Sterling which hit an eight month low of $1.4806 yesterday. Investors had been piling into the pound on the thought that the Bank of England would be the first major central bank to follow the lead of the FOMC and increase rates. But data released this morning showed the UK economy is growing at a much slower pace than previously thought. Britain’s economy expanded by .4% in the third quarter, down from a previous estimate of .5% and below most economists’ forecasts. And 2nd quarter growth was also revised down sharply throwing investors predictions of an eminent rate hike out the window. Another factor weighing on the pound sterling was the upcoming referendum on whether the British should exit from Europe which could be held as early as June of next year.

BOE Governor Mark Carney has continued to let the markets believe an interest rate will come sooner rather than later – something Chuck has been very good about pointing out. And speaking of Chuck – he continues to stew over the FOMC rate increase last week, sending the following which he wanted me to share with all of you readers today:

OK.. the fed mentioned last week after they hike their Fed Funds rate 25 Basis Points to 50 Basis Points (1/2%) that their policy remains accommodative, (no question there), but also that they had begun the “normalization of rates”. (lots of questions there). Really? Because, if you simply look at the history of interest rates, which I did back a few years ago, when we all believed the Fed then about hiking rates, and we issued the rising interest rate “Treasury MarketSafe CD”. The average rate over 40 years was 5.5%… and if you took out the years of zero interest rates, because really, who thought we would keep rates at zero for so long? The average goes to 6.5%… So, the Fed is going to bring rates back to normal? Really? Do you realize, because I’m sure they realize, that the cost alone on their outstanding debt would be crushing to the Treasury? Crushing, I said, and I mean it! If we just use the 5.5% and allow for the “ZIRP Years” the total cost to finance the debt of $18 + Trillion would be north of $900 Billion per year! And, second of all, think of the Fed’s Balance Sheet. it’s over $4.5 Trillion in bonds, that lose value with every interest rates hike. Now the Fed can’t unload these bonds on the markets without causing sizeable shifts and chaos probably, So they hold on to them, and as they do, they take loss after loss when you mark to market, with every rate hike, that leads to “normalization of rates”.

I only point all this out to you dear readers, as a way for you to get your arms around this idea that the U.S. is going to have the best deposit rates of the industrialized world, and see that it’s all a speculative bet. And while the markets continue to be confused by this rate hike as being a sign that the economy is strong, and look for more rate hikes where that came from , while all the while buying dollars, that. while the truth of all this might take a while to come to the markets senses, it’s just another run at something that is inevitable but not imminent.

And I’ll stick with Chuck to close out today’s Pfennig as he sent me the following to pass along to everyone as today’s TTWT section:

Here’s a great piece from Gold Researching guru, Koos Jansen, who interviewed Willem Middlekoop, author of the book: The Big Reset, regarding the financial system of the world, and he’s also a fund manager. Koos Jansen interviewed him and the whole interview can be found on the  website, where Koos posts all his stuff. But I thought this one paragraph was very important and so I’ve brought it over to here, and put it in a snippet. Here you go.

“Any country, like the US, that issues the dominant world reserve currency has almost limitless power to finance other countries. It gives the monetary hegemony ‘exorbitant privilege,’ as the French remarked in the 1960s. Because it can print the world currency the US can buy anything it wishes without having to worry about its liabilities. While the Soviet Union collapsed because they had to import food with hard-earned dollars from their oil exports, in the 70s and 80s, the US could start the Korean War and the Vietnam War with freshly printed greenbacks. By ‘obliging’ foreign central banks to keep their monetary reserves in Treasury bonds, the US in fact forced them to finance US military spending abroad, as Michael Hudson explains in his book ‘Super Imperialism’. In this new form of imperialism, the US is able to rule not through its position as world creditor, but as world debtor. America’s weakness as a debtor country has indeed become the foundation of the world’s monetary and financial system. A Chinese market commentator once remarked: ‘World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy, a dollar hegemony that forces the world to export not only goods but also dollar earnings from trade to the US . Everyone accepts dollars because dollars can buy oil.’ Only when dollar-holding nations decide to buy natural resources instead of US treasuries, is the dollar’s reserve currency status in danger. This is exactly the exit strategy China and Russia seems to be playing right now. In recent years, the Russians have sold most of their dollar holdings, while they tripled their gold position. The Chinese have stopped buying extra US Treasuries since 2010 while they have imported and invested in huge amounts of gold. These developments signal the first stages of the US dollar’s decay.”

Chuck again. So, I believe it’s safe to say that Willem Middlekoop is a believer along with James Rickards of this whole financial system collapse thought, and the Big Reset that will take place afterwards, that won’t be dollar based. Very interesting, eh?

Currencies today 12/23/15. American Style: A$ .7213, kiwi .6766, C$ .7191, euro 1.0915, sterling 1.4892, Swiss $1.0093. European Style: rand 15.2305, krone 8.7181, SEK 8.4318, forint 288.0, zloty 3.8861, koruna 24.75, RUB 70.5975, yen 120.85, sing 1.4075, HKD 7.7503, INR 66.1532, China 6.4731, pesos 17.2072, BRL 3.9684, Dollar Index 98.348, Oil $36.86, 10-year 2.2552%, Silver $14.24, Platinum $868.05, Palladium $550.20, and Gold $1,071.56

That’s it for today. And that is going to be it for my pfilling in for Chuck as he will be sharing his traditional Christmas Eve Pfennig with everyone tomorrow morning. But before I sign off I want to wish everyone a very Merry Christmas and a happy New Year! I hope everyone has an opportunity to enjoy the holidays with your families – I’m really looking forward to our celebrations with both ‘sides’ this weekend. Thanks for reading the Pfennig, and I hope you all have a wonderful Wednesday!

Chris Gaffney, CFA
EverBank World Markets