Don’t Step In Front Of That Bus, Chuck!

March 1, 2018

 * dollar buying is the rage…

* Eurozone Unemployment Rate remains steady…  with no shenanigans!   


Good day… And a Tub Thumpin’ Thursday to you! And Welcome to March! One of my fave months! Today is the birthday of one of our visiting guests from St. Louis… So, front and center today, Happy Birthday Diane! Our Blues finally played some real hockey last night… I was beginning to wonder what was going on in the locker room there! I’m running really late this morning, as I just couldn’t get my motor running this morning for some reason.. The Band Doucette greets me this morning with their song: Mama Let Him Play…    Jazz is much too crazy he can play it when he’s old, he’s too young for the blues, he’s still in his first pair of shoes! 

The markets are still enamored with the thought of 4 rate hikes here in the U.S. this year, and so the dollar buying is still the trade that most traders are willing to execute, because, well, if interest rates in the U.S. are going to be hiked 4 times, then dollar deposits will enjoy a positive rate differential to most of the world for the first time in several months of Sundays! 

And nothing is being spared with the collateral damage of dollar buying being far and wide. I wouldn’t be brave enough to step in front of this moving bus that’s being driven by a crazy idea in my opinion. Sure the idea of 4 rate cuts isn’t that far fetched, given the rise of inflation that we’ve seen, but to act on the idea of 4 rate hikes is just plain crazy if you ask me!

I’ve talked about bond debt servicing before, and if the U.S. Fed Funds rate is almost 3% by the end of the year, the yields on Treasuries will rise even more, and that will put a crimper on the spending of the Gov’t… But will that stop them? NO! They’ll just pass a bill that allows them to deficit spend more!   The Debt Clock projects 4 years out should nothing change, (like 4 rate hikes) and the Debt Clock says that in 4 years our National Debt will be $23.3 Trillion… But I think that’s a conservative outlook, given what’s going on with rates and debt servicing here in the U.S.  

Recall that last week I told you that the latest Treasury Auction by the U.S. saw buyers demand higher yields, and the bills and bonds were being auctioned at rates not seen since 2006…  This is just the start folks… I tried to point out how important the auction was last week, but I’m just one guy with a laptop and an internet connection, that sees things differently than the average bear, and tries to warn his readers of the dangers of the decisions of dolts…  The markets are a beast, and it takes the likes of Lola, aka Goldman Sachs to move them in a different direction…  

Speaking of Lola… She made an announcement yesterday that spooked stock jockeys, but should have spooked dollar bugs too… Lola said that stocks could lose 25%, if the 10-year Treasury yield rises to 4.5%…   The 10-year Treasury’s yield is currently flirting with 3%, and eventually will go above that level. I recently wrote in my Dow Theory Letters ( Thursday letter about how quickly yields on Treasuries can rise once they get moving in that direction… I’ve seen it in the past, folks… I was a short term investments trader back in the day when interest rates here in the U.S. rose to 20%…

They didn’t start a 1.38% like the 10-year’s yield did in, can you believe that it was all the way back in 2012? no way! The 10-year’s yield was 1.38% just a couple of years ago, right? Time flies, eh? Yes, it’s been 6 years since that happened, but let’s just go back 6 months ago, when the 10-year’s yield was 2.07% (9/7/17) You can see how quickly things can change, and the bond boys haven’t really bought into the 4 rate hikes this year campaign yet… When they do… Uh-Oh! 

With the dollar being bought, euros are getting sold, and have given up the 1.22 handle overnight. And with the euro getting sold, all the other currencies are falling line behind the euro to receive their marching orders to the woodshed. Gold held tight yesterday, but is getting sold in the early morning trading, and the price of Oil continued to slip lower with the thought of surging supplies. 

There hasn’t been much news from the Eurozone in recent weeks, and the economic data continues to show a healing process going on with Germany leading the way. The German political scene got good news this week when a ruling coalition was formed, but the euro didn’t get any love from that, with all the dollar buying going on.  This morning, the Eurozone Unemployment Rate held steady for January at 8.6%…  There are no hedonic adjustments in the Eurozone Unemployment Rate calculations, just a simple question, do you have a job… yes or no!

Not like the shenanigans that are played with U.S. job counts…  Where one of the questions are probably like this… Have you worked in the last 10 years? yes or no…   If yes, then you’re counted as employed!  HA!   I kid, but I don’t doubt that something like that is used by the BLS!  

The U.S. Data cupboard showed us the latest revision to 4th QTR GDP and like I said it would do, it was revised downward to 2.5% from 2.6%, which was a downward revision from the original at 3%, and let’s not forget that he New York Federal Reserve  raised its estimate of U.S. gross domestic product growth for the fourth quarter of 2017 closer to 4 percent back in December!    What a Charade!  Can these guys get anything right?

I shake my head in wonderment that the Fed employs thousands of propeller head economists from Harvard and other top notch schools, and they can’t get this forecasting right… Better they stop forecasting altogether, right? HA!   

Today’s Data Cupboard has plenty for us, with Personal Income and Spending for January, which spending should take a hit given the negative print of Retail Sales in January… We’ll also see the Feb ISM (manufacturing index) which will remain bloated at 59…  And Fed Chairman Powell, makes the 2nd leg of his trip to the Hill, today to speak to the House..  I wonder if he has made some changes to his prepared notes in case someone throws him a curve today instead of those soft balls that thrown to him to easily hit out of the park! 

To recap… The dollar buying continues and looks to be strong and wide right now. It’s all about the 4 rate hikes talk that has the dollar bugs all excited, and Chuck thinks the idea is fine, but to act on the idea is crazy given what we all know about debt servicing… Gold held steady yesterday but is getting sold in the early morning trading, and the 4th QTR U.S. GDP was revised downward, but I bet you didn’t hear about that on the evening news!   

For What It’s Worth…  I received this from the GATA folks, but they pulled it from here and so can you?

So, I’ll set this up… I talked a lot about debt servicing above, and the great writer, Ambrose Evans-Pritchard has given us his two cents on the subject, so… here it is…  

“The stress signals of the global credit system are flashing amber. The offshore dollar funding markets that lubricate world finance are facing an incipient squeeze.

The “Libor-OIS spread,” watched carefully by traders, has risen to levels reached during the onset of the Chinese currency crisis in early 2016 and during the onset of the Italian and Spanish funding crisis in late 2011. The three-month rate for dollar Libor (London Interbank Offered Rate) used to price a vast nexus of financial contracts around the world has spiked to a 10-year high of 2 percent this week. A third of all U.S. business loans are linked to Libor, as are most student loans, and 90 percent of the leverage loan market.
The U.S. can doubtless handle the sixfold rise in Libor costs over the last two years since it is a reflection of economic recovery itself. America needs tighter money: The economy is on the cusp of overheating, with a double blast of irresponsible fiscal stimulus coming from the Trump tax cuts and Republican pork barrel spending.

Whether the rest of the world can handle it is less clear. The Libor spike is transmitted almost instantly through global finance. The Bank for International Settlements says any rise in short-term borrowing costs on dollar markets resets rates on $5 trillion (L3.6 trillion) of dollar bank loans.

It tightens the whole credit structure in Asia and emerging markets regardless of what currency it is in. The Libor-OIS spread measures the extra cost that banks charge each other for short-term “unsecured” dollar loans on the London interbank market. It basically takes the pulse of the lending markets.”  

Chuck again… Maybe the markets will listen to Mr. Pritchard! Because they sure don’t listen to me!   

Currencies today 3/1/18… American Style: A$ .7732, kiwi .7220, C$ .7783, euro 1.2188, sterling 1.3750, Swiss $1.0577, European Style: rand 11.8752, krone 7.9298, SEK 8.2875, forint 257.40, zloty 3.4328, koruna 20.8531, RUB 56.27, yen 106.71, sing 1.3266, HKD 7.8269, INR 65.20, China 6.3260, peso 18.89, BRL 3.2467, Dollar Index 90.73, Oil $61.26, 10-year 2.83%, Silver $16.30, Platinum $ 970.68, Palladium $1,014.05, and Gold … $1,311.60  

That’s it for today…  Back to the ballpark today for my second Spring Training game of the year, hopefully our pitcher can get through 2 innings without giving up 6 runs! Again Happy Birthday Diane! And I’m counting the days now until my spring vacation that will begin next Friday! YAHOO! Our Blues won last night, but the St. Louis U. Billikens lost their basketball game, UGH!  Friends from St. Louis and Oklahoma City arrived yesterday, and the good times began immediately! March will be busy with guests and goings on, and that has me pumped!  The great band Chicago takes us the finish line today with their song: Movin’ In…  from their 2nd album, the one that blew me away as a young man listening to it the first time…  And now 46 or so years later, I’m still listening!  And with that, it’s time to go… I hope you can make this a Tub Thumpin’ Thursday, and remember to Be Good To Yourself!  

Chuck Butler