Wait? What? No Reinvestment?

* Currencies remain steady Eddie.
* Gold loses $9 to reason, no data.
* Aussie CPI narrowly misses forecast.
* Revival of Keystone pipeline boosts loonies! .

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

Good Day. And a Wonderful Wednesday to you! Up front and center this morning, I want to apologize for the late delivery of the Pfennig yesterday, it was all spooled up and ready to rock-n-roll out the door and I ran into technical problems.It’s the same-o, same-o, so, whenever the letter is late, first go to www.dailypfennig.com and read it there, and if it’s not there, then think, Technical problems. You will also be able to think that Chuck is in meltdown because of the problems. The Buckinghams greet me this morning with their song: Mercy, Mercy, Mercy. Because she knocks me off my feet, have mercy on me!

Yesterday, I also made a name faux pas, when I mentioned the two ballplayers that died in separate car accidents in the Dominican Republic. I said Infante, and I meant Marte. what Dolt I am sometimes! Alrighty then, all the errors and omissions are accounted for this morning, time to get on with what’s at hand.

The currencies and metals basically drifted throughout the day, with just the tiniest amount of slippage in most of the currencies. But Gold lost $9.20, and the price of Oil also slipped, with the price falling to $52.99. I have to say that the lack of real U.S. economic data is to blame, along with Eurozone data that was at or near expectations. This lack of data that goes back to last Thursday is getting on my nerves. HA! We did have the Treasury Sec. nominee, Mnuchin, talking again, this time he didn’t mention the dollar, but he did say that he believed in an independent Fed, and was against any thought to audit the Fed. That put quite a few lawmakers on their heels, for they were on track to get an audit the Fed Bill done.

In the overnight markets and early this morning, the currencies have held steady Eddie too, except the Aussie dollar (A$) and Canadian dollar / loonie. First, the A$ saw some slippage, not a lot I must say, (in my best Ed Grimley voice) when their latest CPI (consumer inflation) report didn’t meet expectations. 4th QTR CPI rose 1.5% VS expectations of 1.6%, so as you can see, almost bang on, and that’s why the slippage was minimal. And then the Canadian dollar / loonie, saw a bump higher that looks to be an optimistic bump on the news that President Trump signed an executive order to move forward with the Keystone XL pipeline. Maybe this optimistic bump higher with the loonie will be short-lived, and then maybe it won’t. I just think that when you have euphoria over stuff like this, the benefits are usually short-lived for the currencies.

In addition with the A$.. I totally expect the Reserve Bank of Australia (RBA) to maintain their easing bias when they meet next month. The labor picture is good, especially given the slowdown in China, but CPI remains below 2%… I do not expect a rate cut this year, but keeping the easing bias is a psychological thing that hangs over a currency, and again borrowing a line from Ed Grimley, Makes me completely mental.

The euro seems to be in a Holding Pattern over the airport, as it has traded in a very tight range the last 3 trading days, with today being a possible 4th day, of which it is lining up as #4 this morning. Yesterday we saw what I believed to be robust Flash PMI’s from the Eurozone, and the euro didn’t budge. Today, we’ll see German Business Confidence as measured by the think tank IFO.. German economic data has had a tendency lately, to surprise on the upside, and so that’s what I expect for this index today.. Let’s see if the euro moves if the IFO surprises on the upside.

In New Zealand tonight, their 4th QTR CPI will print, and it is expected to meet expectations of 1.6% growth in consumer inflation. Which will put the N.Z. dollar / kiwi in the same boat as the A$… As they both will have a central bank maintaining an easing bias. And you know that Reserve Bank of New Zealand (RBNZ) Gov. Wheeler has an axe to grind on kiwi strength, so keeping the easing bias seems to be right up his alley!

I told you last week that in the latest Review & Focus, which will be posted online in the first week of February and can be found here: www.everbank.com/reviewfocus , that I talked about the possibility that Global Growth was making a comeback. So far, the moves have been nascent, but. Here’s a piece of data from Japan that gives some credence to the thought. Japanese Trade for December was a surplus (remember last year when every trade report from Japan was a deficit?, well no longer!) of yen 0.6 Trillion and beat the expectations of a yen 0.2 Trillion surplus. There is something to make you want to put up the caution sign here though, and that is the fact that the 8.4% increase in exports were entirely composed of exports to China. Wait? What? Is that the same China that everyone says is going to collapse? It is? WOW, and they saw an increase of 8.4% in goods coming into the country? There obviously is some domestic demand, eh?

Well, the loonie wasn’t the only Petrol Currency to rise on the Keystone pipeline news. While Canada would be the country to benefit the most, the other Petrol Currencies rallied along with loonies, even with the price of Oil slipping in the past 24 hours to $52.81. The Russian ruble, Norwegian krone, Brazilian real have all seen limited increases overnight. The Mexican peso tried to rally, but then got the stuffing knocked out of it, when news broke that President Trump is expected to sign an executive order enabling construction of the border wall.

Yesterday I received my Daily Wealth newsletter from my guitar playing buddy, Steve Sjuggerud, which can be found at www.stansberryresearch.com Steve is one of the smartest people I’ve ever met, and he has a gift that allows him to see through the smoke and mirrors and find investments that are “hated” and “beaten down” as diamonds in the rough, buy them and then watch them rally. Well, in yesterday’s letter, Steve talks about the British pound sterling (pound) Steve says, “When I find a truly hated investment, I can hardly hold myself back”

So, we all know that after the BREXIT vote that the pound plunged from 1.50 to 1.20, but then Steve saw something and I’ll let him explain it: “But now, after seven months, we may finally be seeing the turn in the British pound.

Just last week, the British pound had its biggest one-day move in more than 24 years. The pound went up 3% in a day. Now, you might think you should buy after a decline, not a big move up. But history tells us that huge one-day rallies often signal the start of uptrends in the British pound.” – Steve Sjuggerud

Who am I to argue with Steve Sjuggerud? So I won’t, other than to point out all the Debt that the U.K. has, it will act as a governor on the pound’s rise in my opinion. It won’t be a blockade, just a governor. (I love using that term, because younger readers have no idea what I’m talking about, and hopefully they go and ask their dads or grandpas what a governor is. So, it’s a conversation starter!)

Speaking of Debt. I have the Debt Clock app on my iPhone now, so I whenever someone asks me anything about debt in the U.S. I can pull out my iPhone and read the answer right off to them! (I know that sounds pretty nerdy, but hey! Give me a Break! ) So, last week I revisited the question of whether the Current National Debt here in the U.S. would reach $20 Trillion before the Dow reached 20,000, and said at that time, “with the stock market going in reverse, my money is on the Debt to reach its “20” before stocks reach their “20”. Well, yesterday’s price action in stocks has got me sweating bullets that I would lose a dollar!

Hear ye, hear ye, I call this meeting to order. Will the petitioner please rise and state your name: Yes, my name is Chuck Butler, my old friends call me Charlie, and for legal reasons I go by Charles when signing legal documents.

And why are you here Chuck, Charlie or Charles? I’m here to ask one simple question of the Fed members who just last week changed horses in the middle of the stream, and decided to start talking about not reinvesting bonds when current bonds, held in the Fed’s Balance sheet, mature. Just what changed your mind on this reinvestment? Just a few months ago, many of you were touting how it wouldn’t hurt to continue reinvesting bonds that mature, thus maintaining a Balance Sheet of Treasuries and Mortgage Backed bonds totaling $4.6 Trillion? I’ll sit down now and await your answers, you will answer me won’t you?

You see, I’m really concerned about all this talk that’s coming out of the woodwork now about dropping the reinvestment. There’s a good article on Bloomberg regarding this, and you can find it here: https://www.bloomberg.com/news/articles/2017-01-24/fed-debate-over-4-5-trillion-balance-sheet-looms-in-2017

Why does it concern me? Well, basically we all know that the Fed has its site set on hiking rates 3 times this year, and Fed member Rosengren is in favor of 4 hikes this year. Now, I know that the Fed hasn’t delivered promised rate hikes the past two years, but I do believe they are ready to wet their powder this year. Well, view those rate hikes a “tightening” right? Now add the fact that the Fed could be allowing their Balance Sheet to narrow, as the Fed no longer buys bonds to match maturities. That puts more supply into the markets, and that will drive bond prices down. Now, I’ve taught you for years now that bond prices move in the opposite direction of yields. So if bond prices are getting driven down, that means yields are going higher. Interest rates going higher + bond yields going higher = double tightening!

And given the report cards I’ve given you the past year, regarding the U.S. economy, do you really feel that the economy is in any position to withstand double tightening? Alright, I’m going outside to yell at the ocean ( I don’t want to wake up Kathy by yelling at the walls!) OK, I’m back now, it’s a little chilly outside this morning. But back to our discussion, I do understand that the “talk about no reinvestment” is just beginning, and that it would take the fed a few months and meeting before they came to an agreement on something like this, so this double tightening might not take place for a few months. But, let’s also keep in mind that the more the Fed members talk about this, the more the bond boys will begin to price in higher yields.

So, Gold lost over $9 yesterday. That was a smack right in my face, for it was yesterday morning that mentioned that Gold had put together a string of rally days with small gains. There was no data, no Trump Tweets, nothing to drive the price of Gold lower by $9 but that’s what happened. So, I guess the paper trades won the day. Have I told you lately, how much I dislike paper trades in Gold & Silver?

Well I found this to be interesting. Russia is selling one of the world’s largest untapped Gold deposits for 145 Million. They got the sale completed amid the economic sanctions still placed on them. The 145 Million will help Russia as they continue to climb out of a recession, that was caused by the economic sanctions. (and the plunge in oil prices but they can still make money above $40, as the Central Bank of Russia (CBR) uses $40 as their default price when doing the budgets.) And here’s the interesting part to me. Wouldn’t it be just like Russia to just take back the company in a few years? I can see that happening. here’s a link to the story that was in Reuters should you want to read it: . http://www.reuters.com/article/us-russia-sukhoilog-idUSKBN1571MA

The U.S. Data Cupboard had the December Existing Home Sales data yesterday, and I told yesterday that this data was expected to soften. Well, it did more than soften, it got very weak! Existing Home Sales dropped 2.8% in December. But, even with this drop in the last month of the 4th QTR, the actual 4th QTR performance was good for Existing Home Sales. And I always tell you, be yourself.. No, wait! I always tell you that one data set doesn’t make a trend for an economy, just like one swallow doesn’t make a summer!

To recap. The Currencies, for the most part, held their gains Steady Eddie in the overnight markets last night, and start the day on a good foot. Gold lost $9 yesterday, on no news, no data, and no reasons. The price of Oil slipped back below $53 and stayed there through this morning’s trading. The Keystone pipeline is back on the docket, and that pushed the loonie back above 76-cents and allowed the other Petrol currencies to go along for the ride. Chuck goes before the court and asks a simple question. Aussie CPI fell just short of meeting expectations and the A$ had to take a shot across the bow. And the euro hasn’t reacted to anything lately, trading in a tight range.

For What it’s Worth. Well, this article caught my eye, as something that could become a real problem here in the U.S. It’s an article about how commercial mortgage loans made in 2007 will come due this year to the tune of $90 Billion that will have to be refinanced. Does that sound like it could become a real problem? I do.. and you can find the whole article here: https://www.bloomberg.com/news/articles/2017-01-24/a-90-billion-wave-of-debt-shows-cracks-in-u-s-real-estate-boom

Or, here’s your snippet: “A $90 billion wave of maturing commercial mortgages, leftover debt from the 2007 lending boom, is laying bare the weak links in the U.S. real estate market.

It’s getting harder for landlords who rely on borrowed cash to find new loans to pay off the old ones, leading to forecasts for higher delinquencies. Lenders have gotten choosier about which buildings they’ll fund, concerned about overheated prices for properties from hotels to shopping malls, and record values for office buildings in cities such as New York. Rising interest rates and regulatory constraints for banks also are increasing the odds that borrowers will come up short when it’s time to refinance.

“There are a lot more problem loans out there than people think,” said Ray Potter, founder of R3 Funding, a New York-based firm that arranges financing for landlords and investors. “We’re not going to see a huge crash, but there will be more losses than people are expecting.”

Chuck again. I would think that anyone coming to a lender with the request for a loan on a Mall would be turned away in a NY minute! First of all Malls tend to have higher loss rates than other property types, after a default, and with online sales taking the bulk of commerce away from the brick and mortar stores, I just don’t see the survival rate here being very high..

Cheap credit. Where has all the cheap credit gone? Long time passing. When will they ever learn? Alrighty then Chuck, time to move along, you’ve thrown this grenade from left field, now head to the dugout and take cover!

Currencies today 1/25/17. American Style: A$ .7542, kiwi .7250, C$ .7620, euro 1.0742, sterling 1.2540, Swiss $ .9982, . European Style: rand 13.2816, krone 8.3150, SEK 8.8250, forint 288.35, zloty 4.0510, koruna 25.1362, RUB 59.27, yen 113.62, sing 1.4190, HKD 7.7573, INR 68.11, China 6.8559, peso 21.53, BRL 3.1639, Dollar Index 100.02, Oil $52.81, 10-year 2.48%, Silver $17.11, Platinum $999.85. Palladium $792.85, Gold $1,208.80 and SGE Gold $1,222.79

That’s it for today. Well, our Blues finally got back on the winning side of a game last night, beating the Penguins 3-0. I heard that my good friend, Duane, is doing great after his surgery. That’s great news! It looks like it will be another Chamber of Commerce day here, which is why I’m here! I got a little too much Vitamin D yesterday, but just a little bit too much, no biggie. I’m very careful about my exposure in the sun these days.. When I was a young man building swimming pools for a day job, in the hot Oklahoma sun, I sure never worried about how much sun exposure I received! Ahhh, those were the days my friend, I thought they’d never end! Cut off jean shorts, boots and a white t-shirt, is what I wore to work, and by noon the T-shirt was on the ground, as it was sweat soaked and too heavy. The Big Boss Frank Trotter has similar stories of how he cleaned out the gas tanks, a very dangerous job, indeed! Well, the things we did as youngsters, eh? Earth, Wind and Fire takes us to the finish line today with their song: Shining Star. You’re a shining star, no matter who you are! So, now let’s see if we can go out there and make this a Wonderful Wednesday! Be Good To Yourself!

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