Where Have All The Fed’s Arrows Gone?

* Currency rally hits a roadblock.
* Fonterra announcement hurts kiwi.
* PPI hints at a return to deflation.
* Chuck talks to the DR!..

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

Good day.. And a Happy Friday to one and all! It’s the 15th of the month, so that makes this a pay-day Friday, which means the only thing that could make it better was if it was a 3-day holiday weekend too! We’ll get one of those next weekend, when, can you believe this?, Memorial Day Weekend comes along. I’m greeted today with a recording that I think everyone should have as a part of their music collection. It’s the great Rev. Al Green, singing: How Can You Mend A Broken Heart?… So, given all these things happening today, I proclaim this is going to be a Fantastico Friday! YAHOO!

Front and Center this morning. All the euphoria in the currencies and metals the last two days is getting tested by dollar buying this morning. Maybe we moved too far, too fast? Well, that most likely is the answer, given there has been no market moving stuff going on. U.S. wholesale inflation as measured by PPI, was awful, and reminded me of shades of deflation, and certainly not inflation, but I’ll talk more about that later this morning. But with an awful PPI print yesterday, you would think that traders would have no problem going ahead and keeping the throttle down on dollar selling, but Noooooooo! Have I ever told you that Traders are fickle? Of course I have, but that’s just a friendly neighborhood Spiderman reminder.

One of the first things to catch my eye this morning, when I turned on the currency screens, was the selling in the New Zealand dollar/ kiwi. But first let me tell you a little story about the markets as a whole (stocks, bonds, currencies, metals, et. al) take kneejerk reactions to news items today, like they have never done before, and the moves are violent most of the time. And with 24/7 news around the world, nothing flies under the radar any longer. So, keeping that in mind, we all know that New Zealand has three major exports, dairy, wool and lumber. And so last night, Fonterra, which is a global co-op-owned company that provides 22 Billion liters of milk each year. Well Fonterra made an announcement that that they were going to have to make an unexpected cut in production volumes. That news whacked kiwi, to the point that most of the gains made earlier in the week by kiwi were wiped out. UGH!

Well, it also looks as though the great-global bond selloff that was going on earlier this week, is correcting itself. The 10-year U.S. Treasury yield, is back down to 2.19%, just about where it started the week, and the 10-year German Bund auction yesterday saw the avg. yield drop to .68%… The price of Oil slipped back below $60 overnight, and Gold is weaker by $8 in the early morning trading. It’s as if someone said HALT! And every asset class but stocks, saw their mid-week moves erased.

Still no news from the Eurozone and Greece talks. I did see an article that made me laugh. The title of the article says it all.. Draghi Influenced by fear of Germany, Greek official says. And then it goes on to say that Greek Finance Minister, Varoufakis, is telling everyone that, “European Central Bank President Mario Draghi is filled with fear at the thought of helping Greece because of the likely response from German Hardliners” Now, I don’t know about you, but that strikes me as funny, that Draghi is scared of the Germans.

On a sidebar. Now that my “older kids” are grown up and their friends still come around with them from time to time. They always tell me that their friends were scared of me. I say, but they’re grown up now, and my kids tell me that their friends are still scared of me! Now, a lot of you have met me in person over the years, I’m just a big teddy bear. I have no idea why those kids would have been scared of me, but I glad they were!

To follow up the Eurozone / Greece stuff though, it was reported last night that the German newspaper: Handelsblatt will print an interview with European Central Bank (ECB) Governing council member Weidmann today, in which he will sharply criticize the continued approval of the ELA (Emergency Liquidity Assistance) funding for Greek banks. You may recall that this guy Weidmann also criticized the ECB’s Quantitative Easing / QE. So, maybe Draghi has good reason to be fearful of German hardliners!

The Blues guitar legend, B.B. King died last night at age 89. The WSJ just sent me an email telling me that.

The Aussie dollar (A$) has lost nearly 1-cent since yesterday morning. Could these negative moves in A$ and kiwi be attributed to what forecasters are saying about an El Nino event this year? According to a research report I read yesterday, “For the first time, all major forecasters agree that a major El Nino event is likely this year. El Nino years get much more attention in commodity markets than FX, but there is strong evidence that El Nino leaves a footprint in currency markets too. In the past El Nino events, the Canadian dollar/ loonie received a lot of love, so El Nino was bullish for loonies, however, it was bearish for A$’s and kiwi. Hmmm.

Well, those forecasters have been wrong about these calls for an El Nino event before, so let’s not count our chickens before the eggs hatch here folks.. It was just a thought that I threw out to maybe make some sense of these moves.

Well, looky there. PPI (wholesale inflation) also disappointed yesterday, (what else is new when it comes to U.S. economic data, that hasn’t had the stamp of hedonic adjustments placed on it by the BLS?) and the index unexpectedly dropped to -.4%… Expectations were for at least a .1% gain, but that was not to be. so, as I said yesterday, with the Retail Sales data, retailers have found that they can’t increase margins. And so, no inflation, as the Gov’t Accountants tell us. And with no inflation, and in fact a step back to deflation, how can the Fed rationalize a rate hike? I’m just asking the question, folks. And if a Fed member, and I know there are quite a few readers at the Fed, and if they could forward the question to their favorite Fed member, And that Fed member would like to respond, I would certainly be appreciative, because I really want to know. Inquiring minds need to know!

I did an interview with Pete Coyne at the Daily Reckoning (www.dailyreckoning.com) yesterday. It was one of those interviews where we covered a lot of ground, and I gave him my best educated , years of experience, answers, and explanations as to why I thought my answer was the best! Longtime readers know that I refer to the DR and the 5 Minute Forecast many times each year, for they are main reads of mine, and if I think they are that good, I want you dear readers to also check them out!

One thing we discussed was whether or not I thought the U.S. would experience a “by the book” recession this year. Of course I said, that I didn’t think we ever really left the recession in 2009, but I don’t want to spoil the soup of this interview that will appear in the DR at some time soon. But one thing that I was loaded for bear to discuss regarding recessions, but somehow I missed the opportunity at this point, is the fact that The Fed has used just about all the arrows in their quiver, should the U.S. actually experience a “by the book” recession, for the Fed has shot most of their arrows. Sure they could cut rates to zero, but with them being at zero already, that won’t help much. During past recessions, since the 1970’s in the U.S. the Fed cut its benchmark interest rates by an average of 6.2% and a minimum of 5%… So, you can’t count on that helping the economy with current interest rates near zero.

What could they do, what could they do? Actually wouldn’t it be better if they didn’t do anything, and just let the recession run out, clear out the excesses and then start over? Of course it would! But that’s not the mindset of Central Bankers today. They feel they know better, and that they have to do something, anything, but let the recession run out. So, I started thinking about other dastardly things the Fed could do here in the U.S. to combat a recession. How about negative rates, that they use in the Eurozone and Switzerland now? How about. No I’m not going to say it, because it would get everyone all upset, and I would get called on the carpet for upsetting everyone, and so on. So come to the Butler patio, I’ll tell you out there!

But if were a Fed member right now. I would be having many sleepless nights worrying about 6 years of stimulus and no “real economic expansion” and the threat of a recession revisiting the U.S. economy, and knowing that they are down to just one or two arrows in their quiver.. Reminds me of an old song. but I’ll change the words a bit. Where have all the Fed’s arrows gone? Long time passing.

Gold is down $6 right now, as it has gained a couple of bucks since I was writing about it earlier this morning. Did you see the news story that German investors are piling into Gold now? According to the World Gold Council, Germans increased their buying of Gold coins and bars, by 20% (32.2 tonnes) in the 1st QTR. This is the highest rate of purchases seen in a year. And notice that they were buying all physical Gold, no paper trades?

And why would the German investors see this the time to begin to pick up large quantities of physical Gold? Well, Gold is a safe-haven asset is it not? And don’t things look pretty sketchy in Europe right now? And actually increased buying was seen taking place all over Europe as investors try to find a safe place while the Greek debt problems continue to play out.

And my friend, Dave Gonigam, over at the 5 Minute Forecast, told me yesterday that Indian PM Modi was going to travel to China to meet the Chinese leader Xi. I can hear Modi telling Xi. “you may have taken our pole position of Number 1 Gold importer away from us, but we’re going to get it back. And Xi replying. I double dog dare you! HAHAHAHAHA!

The U.S. Data Cupboard has two of my fave prints today. Industrial Production and Capacity Utilization. These two pieces of economic data have been quite disappointing for the last 6 months, as the rot on their respective vines sure hasn’t been “Transitory”. I would look for these two to continue to disappoint in their April prints. We’ll also see the U. of Michigan Consumer Confidence for this month, and the once feared print but not any longer, Net TIC Flows.. (net foreign purchases)

To recap. The rallies in the currencies and metals the past two days have hit a roadblock this morning, and the dollar bounces back. Fonterra throws a cat among the pigeons in New Zealand and kiwi gets whacked. The A$ also got whacked overnight, could it be the early signs of an El Nino year? Probably not, but it’s fun to think about whether events in FX markets, eh? Draghi is scared of German Hardliners, and Gold is down $6 as I go to the reviewers.

For What It’s Worth. Well, as many of you know, my guitar playing investment guru, friend, Steve Sjuggerud, writes a newsletter, and it’s not often I get an opportunity to share with you something he’s said. But yesterday, his Daily Wealth letter (www.dailywealth.com) Talked about China, and I just had to confiscate a couple of paragraphs of his letter to point out it’s not just me that sees China moving at a faster pace to achieve their goals of not only having the premier currency of the world, but also to have the strongest economy in the world. Now, I just have his final thoughts, but they are quite telling. Here’s Steve.

“China is way more advanced than you think. Americans don’t know this, and they are underinvested.

In my newsletters, we are heavily invested in China and emerging markets. Based on this trip, I am extremely happy with those positions.

I highly recommend that you add some exposure to China to your portfolio. now.”

Chuck again. Chuck again. a strong take from Steve on this . . . while I personally agree with his basic premise, keep in mind that that emerging market exposure is speculative and not suitable for everyone . I will also add that this commentary plays well with our current MarketSafe CD, called Future Economies MarketSafe CD, we just put to be the first issue, and are now accepting deposits for the 2nd issue that will end on June 5th. (see the sponsor ad above, and click for details)

Currencies today 5/15/15. American Style: A$ .8015, kiwi .7445, C$ .8320, euro 1.1355, sterling 1.5710, Swiss $1.0845, . European Style: rand 11.8565, krone 7.3775, SEK 8.3010, forint 270.40, zloty 3.5645, koruna 24.1120, RUB 50.06, yen 119.90, sing 1.3255, HKD 7.7510, INR 63.51, China 6.1085, pesos 15.13, BRL 2.9930, Dollar Index 93.80, Oil $59.61, 10-year 2.19%, Silver $17.37, Platinum $1,153.09, Palladium $785.10, and Gold $1,213.33

That’s it for today. Brother, I saw the weather forecast for our area last night, and it appears we are destined to have another weekend of rain. UGH! The Cardinals come home from a 6-game road trip 3-3. Not too shabby. My dad always told me that if a team played .750 ball at home and .500 on the road, they would be in the pennant race. So, now they need to start hitting the ball again! Chicago is playing, Does Anybody Really Know What Time It Is? On the iPod right now. Back in the day of the traveling band, this is one of the few songs they let me sing. Our singer, Steve Bushy had a golden voice, so my opportunities to lead sing were few. So, I still have this “cough” that drives me nuts sometimes, and my wife is still coughing, so our house sounds like an infirmary. Better steer clear of the Butler house! HA! The Cure is playing their song: Friday, I’m In Love right now. And it’s Friday! How cool is that? My longtime colleague and friend, Jen Mclean, highly dislikes this song, which is why when I was out on the trading desk, I would turn up the volume when it came one! HA! So, it is a Friday, a Fantastico Friday as crowned at the top today. It’s time to get off this bus today. I hope you have a Fantastico Friday!

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