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Yellen Cuts Off Currency Rally..

* Full Employment? .
* Chuck goes old school economics .
* ECB meets today.
* China sells more Treasuries! .

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

Good Day.And a Tub Thumpin’ Thursday to you! Well, I’m really draggin’ the line this morning. But maybe by the time I get to the point where my fat fingers are flying around the keyboard, and the stream of consciousness is flowing, I’ll come around.. Well, Janet Yellen put an end to the currency rally yesterday, and Gold gave back most of its big gain on Tuesday, and Chuck just can’t believe the reasons the currencies gained in the first place have faded away. ELO greets me this morning with their song: Telephone Line. I always liked the music of ELO (Electric Light Orchestra), and they made late 70’s and early 80’s music more bearable for me.

Well, let’s get right to the meat of today’s letter, which is going to be the Janet Yellen speech on Capitol Hill yesterday. Well, Janet Yellen made her first of two speeches on “the Hill” yesterday, with day 2 to happen today. She told the lawmakers that the Fed saw that inflation was moving toward their goal, and that employment has reached full employment.. Hmmm. I’ve got some info for you on inflation that we’ll get to in a minute.. I don’t doubt the inflation thing one bit, I’ve seen it and written about it for a couple of years now, how companies were selling their goods in smaller packages but charging the same. That’s inflation, but you won’t find it in the price. But you’ll find when you have to make several trips to the store that used to take just one! So, there have been games that were played. And what’s with the CPI? The stupid CPI I must say, it has not shown much inflation at all over the past few years, but we all know that there’s been increases in
just about everything. Take my spring training tickets. The same amount of games, same seats, and the cost of my Spring season tickets went up $800 this year.. And in the past 14 years that I’ve been buying tickets to Cardinals Spring Training, the increase is phenomenal. But again, not everyone experiences this “inflation”.

But meeting the full employment goal? I wanna be a real smart alec here, but discretion is going to be the better part of valor on my part, and just say this instead, I guess 95 million Americans that have been dropped from the Unemployment ranks would have a different opinion about your “full employment” wouldn’t they?

Nevertheless, Janet Yellen told the lawmakers that we could expect to see “a few rate hikes this year”. And friend, and investment guru extraordinaire, Doug Casey, recently wrote, he believes that we could see larger rate hikes than just the usual 25 Basis Points (1/4%) He thinks we could see rate hikes at 50 Basis Points (1/2%) or even larger. And the Fed can point to the new president’s inflationary stimulus (remember he wants to spend $1 Trillion on stimulus ) as the reason for their moves.

Her comments helped the dollar regain some lost ground, not a lot, but some, as the markets aren’t still 100% on board with 3 rate hikes this year, and they point to the bond boys as that reason. Bond yields did rise a bunch after the December rate hike, but they’ve pretty much held steady since, even in the face of 3 potential rate hikes this year. The 10-year is trading at 2.43%, yes the yield rose after the Yellen talk yesterday from the 2.35% it had traded at for about 2 weeks.

And Gold got whacked! The shiny metal nearly gave back all of its big gain on Tuesday, when it posted a $14.10 gain, but gave back $12 of that move in yesterday’s selling that came after the Yellen speech. The dollar Index rose back above 101 after her speech, and U.S. stocks got whacked too. So, Gold, currencies, bonds and stocks all got whacked. What’s left? Commodities, and they didn’t fare too well either yesterday. I know, I know, it’s just one day of trading, but it really gets under my skin, gives me a rash, and causes me to yell at the walls. Just the day before, I finished the Review & Focus for Feb and I pointed out how the prices of core commodities like Iron ore, and copper had recently performed nicely, and then the next day they get whacked. UGH! I still have that slide I used to show everyone of the man at his desk banging his head on the desk, and I used to tell people that it was me, punishing myself for calling the bond bubble pop, right before the Fed announced their first round of money printing, I mean, Quantitative Easing/ bond buying/ debt monetization.. I think I’ll have to get that slide out for next month’s Review & Focus!

I was, as I’m apt to do on a regular basis, checking out the Debt Clock that I’ve pointed you all to for many a year now, and should be a “favorite” link on your computer by now, but in case it isn’t: And something caught my eye. it was the under the heading of M2 Money Supply.. Well M2 Money Supply in 2000 was 4,673, 689, 000,000 and guess where it is today? 13,386,340,000,000 (I rounded off the numbers because they change every second) And these numbers I have just given you will be larger by the time you read this, and click on the link! But imagine that if you will, a 186% increase in Money Supply here in the U.S. in 16 years. annualized, that’s 11.625% per year.

Now I remember my old economics classes, and one of the things I was taught, back in the dark ages as my kids would say, and then follow that up with “did you have a horse and buggy back then dad?” But one of the things my professor focused on was his feeling that if you track Money Supply, you’ll know what the rate of inflation is. So, using those “old school” thoughts, inflation has been running at 11.625% per year for the last 16 years. Now, we all know that inflation is a personal thing, right? I’ve harped on this for years, so you should know it by now. (I’m a little testy this morning aren’t I?) But something that’s inflationary to me, might not even be used by you, so you don’t experience that inflation. For instance, I have a child in college, I experience huge increases each year for his college education. But a lot of folks don’t have a kid or kids in college so they don’t experience those increases or inflation.. But any-old-way, I just wanted to point that
increase in the Money Supply out to you and let you decide for yourself if this is important or not.

The European Central Bank (ECB) actually does meet today (recall last week I was a week ahead with that announcement. UGH!) and all I expect from this meeting is for ECB President, Mario Draghi, to emphasize once again that when he announced at the last meeting that bond purchases would start to be reduced in March, that it was NOT TAPERING! Well, maybe they have a different word for it in Europe, but here we call that tapering. When you reduce something you taper. Here’s the definition: 1.diminish or reduce or cause to diminish or reduce in thickness toward one end 2. A gradual narrowing

So, call it what you want to Mario, I’m saying it’s tapering and it’s about time it happened! I will want to hear what he has to say about the fact that inflation is rising in the Eurozone. I’ll bet a dollar to a Krispy Kreme donut that Draghi just allows any mention of rising inflation to slide, and if pressed on the subject, I see him attempting to explain the rise in inflation as merely a rising Oil price thing, and something the ECB is watching, but for now, not concerned.

The euro which was knocking at the door to 1.07 yesterday before the Yellen speech, has backed away from the 1.07 door, but is still trading with a 1.06 handle this morning. Brother, have there been some nasty reports/ articles out there recently regarding the Eurozone, and the euro. I get it. it’s low hanging fruit, and easy to knock off the tree and beat it up. But for now, the euro continues to exist, and be somewhat resilient (I just gave it the kiss of death though, UGH!). And the longer it goes on like this, the les we’ll see the nasty articles.

The Aussie Employment Report printed last night, and I told you yesterday, that I expected it to continue to shine, and shine it did, beating the expectations of 10,000 jobs created by printing 13,500 jobs created in December. Employment in Australia continues to be resilient and strong, and that’s a good thing for Australia’s economy. The Aussie dollar actually gained a tiny bit on the report. The Aussie dollar (A$) isn’t a component of the Dollar Index, and neither is the A$’s kissin’ cousin across the Tasman, kiwi. In the weak dollar trend that began in 2002 and ended in 2011, these two currencies gained phenomenal amounts VS the green/peachback (US$) but their gains never showed up in the dollar index, and that’s why I tell you all the time that the Dollar Index isn’t a good way to track the dollar as a whole.

Inflation in the U.K. picked up in their latest CPI report, and that lit a fire under the pound. The pound, which started the week around 1.2165, has moved higher to 1.2310-ish.. But I have to question why the pound would rally on higher inflation? It’s not like the Bank of England is champing at the bit to hike rates! PM May, presented her position on BREXIT on Tuesday, and as most people thought, she announced that the U.K. would leave the single market for goods a services. This basically is a cutting of the cord, and once this is done, the U.K. will be on their own. But, I guess that’s what they want.. I always say, be careful of what you wish for.

The price of Oil remained in the $51 handle in the past 24 hours. I find it pretty interesting that the Russian ruble remains well bid. That tells me that either 1. The ruble is lagging in price VS Oil, or 2. That maybe, just maybe, because you never know, but maybe Russia’s large yield advantage over the U.S., Japan, Eurozone, and just about everyone else on the planet not named Brazil is taking over for Oil. Well, I think that while the yield advantage might kick in and help, but the price of Oil is tied to the hip of the ruble.

The U.S. Data Cupboard yesterday was interesting. First, the stupid CPI, showed that consumer inflation (per their calculations which include more hedonic adjustments than you can shake a stick at) rose just 0.2% in December. That puts the annual CPI at 2.1%, that breaches the Fed’s 2% target, but remember, the Fed doesn’t use CPI as their go-to data for inflation, instead they use their own LMCI (Labor Market Conditions Index).. and at last check, the LMCI wasn’t screaming rate hike.

Industrial Production (IP) also printed for December, and reversed the negative print in November of -0.7%, by printing a positive 0.6% for December. Overall though, for the 4th QTR, IP fell at an annual rate of -0.6%… Utilities saw a huge increase in December, and the November warmer weather was to blame the previous month. In addition, we also saw Capacity Utilization (one of my faves!) which rose to 75.7 from 75.5..

So, there you have it. I’m still draggin’ the line, but coming around. I got to talk to the Big Boss, Frank Trotter yesterday. YAHOO! And he wasn’t calling me to tell me I was no longer needed! HA! Just a friendly chat of the state of the Union, if you will. It’s funny, the first year I was here, I got calls all the time from people, then last year, they faded, and this year, they are non-existent. I guess the old saying, Out of sight, out of mind, is bang on, eh?

To recap. The currency rally was cut off at the knees yesterday after the Janet Yellen speech on Capitol Hill.. She talked about how the Fed’s goals, of full employment, and 2% inflation, have been met, and therefore she see ” a few” rate hikes this year. Chuck agrees with the inflation thing, but wishes the stupid CPI would reflect inflation better than it does, but he takes issue with the Full Employment, given that 95 Million American workers are still looking for jobs, but have been dropped from the Unemployment data. The currencies lost some ground, but not a lot after her speech. Gold got whacked again, this time, giving back almost all of its nice gain on Tuesday. And Chuck goes “old school” with economics.

For What It’s Worth. The January Review & Focus which can be found here: has quite a bit of the letter focusing on U.S. Treasuries, and their future. In the R&F I talk about how China and Saudi Arabia have been selling their Treasuries, while Russia just doesn’t show up at the auction house any longer and buys Gold instead. So, Ed Steer highlighted an article that’s in the Financial Times this morning, so unless you have subscription to the FT, you won’t be able to read the whole article. I do have what Ed gave us (thanks Ed!) So here goes.

“China cut its holdings of U.S. Treasuries by $66 billion in November, reducing its position in the safe-haven debt to the lowest level since 2010 as the country battles to stabilize its currency.

The acceleration in sales — the largest monthly decline since December 2011 — threatens a rise in U.S. interest rates if it continues and follows an unwinding in October that saw China cede its position as the largest foreign holder of U.S. Treasuries to Japan.

China has been selling its foreign exchange holdings in part to support the renminbi, which has fallen 4 percent against the U.S. dollar since the start of last year. The fall in Treasury holdings is part of a wider campaign by Beijing to stem capital outflows.”

Chuck again. The key thing here is that looking out on the horizon, I see the U.S. issuing more and more Treasuries each year to finance the deficit spending that is forecast to come down the pike. And if a couple of your biggest buyers aren’t buying and instead are selling, how are you going to be able to finance that debt?

1. Have yields rise aggressively to attract investors ( but what would that do an economy that’s teetering on recession now?)
2. Weaken the dollar aggressively to make the purchase cost of the Treasuries by foreigners more attractive.
3. Default.

That’s all I have to say on that, folks. but if you haven’t read the R&F this month, I suggest you do, and again you can get there by clicking here:

Currencies today 1/19/17. American Style: A$ .7555, kiwi .7177, C$ .7530, euro 1.0657, sterling 1.2320, Swiss $.9941, . European Style: rand 13.5690, krone 8.4652, SEK 8.9398, forint 289, zloty $. 4.1022, koruna 25.3575, RUB 59.28, yen 114.62, sing 1.4270, HKD 7.7571, INR 68.12, China 6.8942, peso 21.95, BRL 3.2153, Dollar Index 101.09, Oil $51.3, 10-year 2.43%, Silver $17.08, Platinum $965, Palladium $754, Gold $1,204, and SGE Gold $1,230.70

That’s it for today. it was like pulling teeth to get all the prices for the currency round-up this morning, some of the templates I use, weren’t updating, and so on. UGH! Well, I had a major faux pas yesterday, and forgot to mention it was my youngest brother’s birthday! I doubt he reads this letter, but my sister Joanie does, and she’ll let him know that I said: Happy Birthday Mike! I did remember to send him a Happy Birthday text! What a beautiful day it as yesterday, here in S. Florida. I hear it’s warming up in St. Louis too, in what we used to call the “January thaw:” Enjoy it while you can! We went out for pizza last night, and somehow walked into the place to see 2/3rds of the restaurant tables occupied with people older than us. And I thought I was the only old person that still went out for pizza! HA! And with that Fleetwood Mac takes us to the finish line today with their song: Over My Head. A very underrated guitar player in the band, Lindsey Buckingham. So,let’s go out and make this a Tub Thumpin’ Thursday! And Be Good To Yourself!

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

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