August 31, 2020
* Currencies & Metals both rallied strongly on Friday…
* Chuck questions just what the heck did Powell say?
Good day… And a Marvelous Monday to you! Ok, front and center this morning… I had my scans on Thursday morning, and one Friday morning I received the results… No new cancer was found…. Of course I still have the lesion in my jaw, but right now it’s behaving…. So, I’m good to go cancer-wise for another 3 months… What has happened to my beloved Cardinals? Well, if you recall me talking about their lack of ability to hit the ball in spring training, then you know the answer to my question! Now they did find a way to win 1 game yesterday, but that hardly makes up for the 4 previous losses! I had a visit from a dear reader this weekend, and we had our picture taken together… You know when I used to travel to trade shows, etc. to speak, I would always have a reader ask to have their picture with me…. I always found that to be quite amazing, and fun! Graham Nash greets me this morning with his song: Simple Man… I am a simple man, and I sing a simple song,…. In that beautiful Graham Nash voice!
OK… Well, You can say that I was technically “away” on Thursday and Friday, because the currencies and metals took some frustrations out on the dollar bugs. Yesterday (Sunday) I checked the markets, just for grins to see where we were…. And I was surprised by the strength in the Aussie dollar (A$) . The A$ had blown through the 72-cents handle and is trading with a 73-cent handle this morning. National Australia Bank (NAB) issued a report that their currency team came up with that said that the A$ was rallying on the fact that the U.S. Fed was printing more currency than the Reserve Bank of Australia (RBA) and that Iron Ore prices were rising, which in their opinion was a good thing for the A$, of which I would agree! NAB went on to say that they saw the A$ rallying to 74-cents by year-end, and trading as high as 75-cents in 2021, but averaging 74.25-cents for the year.
One thing they forgot to mention was the revival of the Chinese economy , of which we talked about briefly last week, and that’s probably why Iron Ore prices are rising again! Remember the glory days for the Aussie economy, when China was running on all 6, and they demanded the raw commodities from Australia? Recall how that scenario pushed the A$ to $1.05 VS the U.S. dollar? Well, the Chinese recovery is nascent at best at this point, so there’s no reason to think that scenario will return, but… if things keep going in this direction…. You never know!
The euro too, has taken the high road VS the dollar lately…. And this rise all stems from the news that the Eurozone will begin to issue Eurozone Bonds…. Federalization of bonds is what it’s being called, and it’s something I’ve called for the Eurozone to implement for a long time now… They have a single currency, they should have a single bond…. A couple of weeks ago the euro had reached 1.19 VS the dollar, and then the PPT stepped in a bought dollars, and brought the euro back down, but this morning the euro has moved higher VS the dollar to 1.1936… And inching toward 1.20, which would be the next psychological level for the single unit…
Gold had a good day on Friday, rising $35 to $1,965… But at one point in the day it was up $44 and had to go through the short sellers’ gauntlet at the end of the day. Silver rallied by 52-cents to $27.57… The Fed was responsible for this move, as Fed Chairman Powell, laid out the Fed’s plans to generate inflation…. I have to tell you, that this all backasswards in my book…. The economy generates inflation , not the central band…. But I guess in this world of opposites that this just plays nicely in the sand box with the other things that not right….
In the early markets trading for Gold & Silver they are both inching higher VS the dollar. The two metals seem to be attempting to sneak around the short sellers this morning, so we’ll see who wins the day, eh?
Here’s a snippet of Powell’s talk on generating inflation… “In seeking to achieve inflation that averages 2 percent over time, we are not tying ourselves to a particular mathematical formula that defines the average. Thus, our approach could be viewed as a flexible form of average inflation targeting.26 Our decisions about appropriate monetary policy will continue to reflect a broad array of considerations and will not be dictated by any formula. Of course, if excessive inflationary pressures were to build or inflation expectations were to ratchet above levels consistent with our goal, we would not hesitate to act.”
OK… what the hell did he just say? Did he just say that the Fed Heads will just shoot from the hip on inflation? Ok, before I go the whole 9 yards on Powell and the Fed Heads, I’m going to walk away for a minute…. Ok, I’m back now, and have decided to not go the whole 9 yards at this time, because the Fed Heads haven’t proven that they can generate inflation, and at this time I doubt that they could find their rear-ends with both hands!
And all that confusion over what he DID or DIDN’T say was the reason the dollar lost $35 of value to Gold on Friday…. Now we’ve had a full weekend to digest what the Fed was telling us, and if I’m still in tune with what traders think, I would be that they’re still confused….
Oh!, and one more thing! The thing that really gets my goat is that all the Fed Heads were in agreement to this idea… Not one dissenting vote…. Ok, if they all agree then you don’t need all of them! Even more of a reason to confirm Judy Shelton for a Fed job…. One of my first bosses in the investment arena was a man named Dave Wren…. In a small meeting he asked who agreed, and then he said something that I’ll always remember…. “Don’t you all agree with me, for if that happens I don’t need all of you!” So, me being the new guy, was scared to death, and I disagreed….
Circling back to when I used to give presentations all over the U.S., Canada, and Panama, I used to tell people that a proper diversification of their investment portfolio should include a 15-20% allocation to Gold & Silver…. And when the metals were in rally mode you would want to increase your allocation to 25% This past weekend I read where the Ohio firefighters and policemen pension fund had approved an additional 5% allocation to Gold… That moves their total allocation to Gold to 25%…. You don’t think someone on that pension board attended one of my presentations do you? HA! I loved the comment the pension board made after the additional allocation was approved: “OP&F believe that the addition of gold will give the portfolio a strong diversifier to its growth-oriented investments as well as provide an effective hedge against inflation.”
So…. What are you doing with your portfolio allocation? Well, if you depend on the likes of Scwab, and any other large investment houses, they certainly won’t allow you to have gold as a part of your allocation… So, you’ll have to do it on the side…. And as always, I would prefer you call my metals guru, Tim Smith at 1-800-926-4922, to increase or even start your allocation to Gold / Silver…. And… as always I don’t get paid for telling you to call him…. I do that out of the kindness of my heart! But please tell whomever answers the phone that I told you call!
I received my latest issue of Grant Wiliams’ Things That Make You Go Hmmm. Last night, and so I quickly opened it to read as much as I could before it was time for bed… Grant was talking about how the stock market has gone crazy, and that if we go back to the time period just before the stock market crash in 1929, Business Week had just printed their first issue… Now tell me if you think this was from then or now? ““For five years at least,” they wrote, American business has been in the grips of an apocalyptic, holy-rolling exaltation over the unparalleled prosperity of the ‘new era’ upon which we, or it, or somebody has entered.” It had carried the country “into a cloud land of fantasy.”
“As the fall begins,” they warned, “there is a tenseness in Wall Street… a general feeling that
something is going to happen during the present season… stock prices are generally out of
line with safe earnings expectations, and the market is now almost wholly ‘psychological.” – snippet taken from Things That Make You Go Hmmm… by Grant Williams…
OK, I’m sure you guessed the answer to my question since I set it up the way I did…. But doesn’t that sound eerily like someone could write that today about the stock market?
And it’s not that I’ve become totally interested in talking about the stock market, but right after I read that quote in TTMYGH, I saw this on Twitter from David Rosenberg…. “I realize who Powell actually is: the doctor with the blood pressure monitor at the hot dog eating competition! Investors gorge, get obese, but won’t die. The S&P 500 market cap/GDP ratio, at 132%, just took out the 2000 peak. We know how this ends, we just don’t know when.” – David Rosenberg on his Twitter feed.
OK, I kept telling you that the back end of last week was chock-full-o-data, and so, this is going to be a long report on that data, so either skip ahead, or go along with me through the Data Barn…. First and foremost, the Weekly Initial Jobless Claims remained above 1 Million, making 23 of the last 24 weeks at 1 Million or above… We received a surprise on Thursday when July Durable Goods Order rose %11.2%. But Capital Goods Orders were only 1.9% which wasn’t anything near what was expected… then we saw the 2nd QTR GDP revision which printed at negative -31.7%!!!
On Friday the data deluge continued, and Personal Income and Spending printed for July…. Income was .4% but was better than June’s -1.01%, Spending was just 1.9% VS the 6.2% In June…. So, income was nascent and spending hit the skids…. Hmmm… Corporate Profits were down in July to $1.81 Trillion VS $2.04 Trillion in June. And finally, Core Inflation saw a .3% rise in July.
All-in-all, the Data deluge wasn’t as bad as I expected it to be, but then one never knows who’s driving these data prints to the corral… right?
To recap…. The currencies and metals fought back on Friday, as it took a day for traders to attempt to figure out what Fed Head Powell was talking about… Gold was up $35, and the euro and A$ are leading the currencies to higher ground VS the dollar. Chuck borrows a quote from Grant Williams, and then David Rosenberg adds his two cents in a Twitter comment.
For What It’s Worth… Ok, this may be a little long, but it’s well worth reading, as it’s Doug Noland talking about the Fed…. He does a good job of getting to the point here folks, so… you can find it here: http://creditbubblebulletin.blogspot.com/2020/08/weekly-commentary-its-about-jobs-jobs.html
Or, here’s your snippet: “For the most part, equities took Powell’s Jackson Hole speech in stride. Stocks rose – but they pretty much rise whenever markets are trading. Understandably, bonds were a little edgy. Ten-year Treasury yields rose six bps on the announcement to 0.75%, a 10-week high. Investment-grade corporate debt was under notable pressure. The iShares Investment Grade Corporate Bond ETF declined 0.8%, trading to the low since July 1st (down 1.1% for the week).
There is certainly an element of “the emperor has no clothes” in all this. We know from experiences in Japan, the U.S. and elsewhere that central banks don’t control the inflation rate. The shift to an “inflation targeting” regime was ill-conceived from the start. Rather than admit to mistakes, the global central bank community will continue frantically digging ever deeper holes.
Can we at least admit that inflation dynamics have evolved momentously over recent decades? Could we accept that technology innovation has led to a proliferation of new types of products and related services – profoundly boosting supplies of high-tech, digitized and myriad online products? There has also been the seismic shift to services-based output, altering inflation dynamics throughout economies. Moreover, “globalization” – especially the capacity to manufacture endless low-cost technology components and products globally – has fundamentally changed the inflation axiom “too much money chasing too few goods.”
For now, damage wrought to Fed credibility is masked by record equities and bond prices. In the wanting eyes of the marketplace, the “inflation targeting” regime is mere pretense. Bernanke didn’t punt on the Fed’s “exit strategy” due to consumer prices. Below target CPI was not behind Yellen’s postponing of policy normalization in the face of strengthening booms in both the markets and real economy. And Powell didn’t abruptly reverse course in December 2018 because of lagging consumer price pressure, just as CPI had nothing to do with last fall’s “insurance” stimulus measures.
Any lingering doubt the Federal Reserve has adopted a regime specifically targeting the securities markets was quashed with the $3 TN of liquidity response to March’s downside market dislocation.
Earth to former New York Fed President Bill Dudley: We’re today confronting a deviant financial structure unrecognizable to that from 1987. Have you already forgotten March’s near global financial meltdown? Why did a panicked Fed expand its balance sheet by an unprecedented $3 TN? Why has it capitulated and basically signaled to highly speculative markets that they are committed to looking the other way and just letting things run their course?”
Chuck Again…. You tell ’em Doug! I’m so frustrated with our Fed Reserve, and if it weren’t for the craziness of the stock market, I believe that people would be throwing eggs in the faces of the Fed Heads…. I’m just saying…
Market Prices 8/31/20: American Style: A$ .7356, kiwi .6733, C$ .7650, euro 1.1936, sterling 1.3332, Swiss $1.1083, European Style: rand 16.7102, krone 8.7493, SEK 8.6180, forint 296.75, zloty 3.6826, koruna 21.9907, RUB 74.04, yen 105.95, sing 1.3600, HKD 7.7498, INR 73.20, China 6.8603, peso 21.81, BRL 5.3869, Dollar Index 92.22, Oil $43.50, 10-year .72%, Silver $28.04, Platinum $934.00, Platinum $2,233.00, and Gold… $1,968.47
That’s it for today…. I know I went in several directions this morning, but I had all these thoughts in my head from the weekend of reading that I had to let them out, or my head would explode! Had another driveway happy hour on Friday afternoon, this one was just neighbors, and we had a great crowd, with some rare appearances by folks that are usually at their lake houses! Little Evie was with us, spending the night and stuff over the weekend. Man, I become a blithering idiot when she’s around me. She makes sounds but no words yet, I can’t wait for her to tell me everything she’s talking about now… I’m here all week, try the veal! Yes, no doctor or hospital visits for me this week… YAHOO! I hope you have a Marvelous Monday, and please Be Good To Yourself! I’ll see you… In September, See You when the summer’s through….
Chuck Butler