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Daily Pfennig: Brazil Changes Horses In The Middle Of The Stream

Tuesday August 27, 2013 10:16

In This Issue.

*  BCB wraps tourniquet around real.
*  Nowotny gets behind euros.
*  Rosenberg talks stagflation.
*  An Inconvenient Debt.

And, Now, Today's Pfennig For Your Thoughts!

Brazil Changes Horses In The Middle Of The Stream.

Good day. And a Happy Friday to one and all! The end of a full week of work in the office for me in a month, in what feels like a month of Sundays. So, I'm very happy that it's Friday!  I remember when we started this business, working 6 & 7 days a week, right Christine? And 13-14 hour days. Ordering pizza for dinner on the desk, and other things that make working 5 days in the office look like chump change! It's always good to remind myself where I was prior to 2007.

The 2007 year was noted for more than the change for me, but also the change in the markets, and that's the year that the markets were taken over by Central Banks.  My friend, and writer extraordinaire, Bill Bonner, mentioned this yesterday, saying, "And pretty soon, investors could notice that Mr. Market is taking over controls from the Mr. Bernanke."  I welcome the return of Mr. Market, which would include using fundamentals to value assets. There's not a lot to talk about today, so, let's get going so we can be closer to starting our weekend!

Well, we moved one day closer to whether or not the Fed begins to taper QE3 in September, and with that move came more back and forth on whether or not it will be September or December. I was asked that question by Joe Deaux of the Street.com yesterday in my interview with him, and I told him that even though the economic data doesn't give us any indication that September would be the beginning of tapering, that the fact that the Fed Chairman, Big Ben Bernanke, will end his run as the leader of the Fed Heads at year-end, so, I would think that Big Ben Bernanke would want to get this whole process started and begin to see the effects before he rides off into the sunset. Therefore, September seems about right for me, even though the economic data doesn't lead me to say that.

If the Fed does choose September as the beginning of the end of QE3, they need to make certain, and I mean absolutely certain that the markets understand that this does NOT mean the end of monetary policy. If they don't, the markets will react violently, and we could see yet another jump in the 10-year Treasury yield.  And remember, if the Fed does begin to taper, that means that QE is still adding to their balance sheet every month. A balance sheet that has a very large loss in bonds now, but if yields continue to rise, the loss could explode.

So, that's all the talk in the markets these days, folks. The bias in the currencies yesterday and this morning, is to buy dollars, but it isn't a strong bias, and is acting as if the dollar bugs would easily give up their hold on the bias if they were challenged. The Weekly Initial Jobless Claims that printed yesterday showed a gain of 13,000 claims last week. I told you yesterday that I was expecting a gain, so there you go!  But that data didn't carry much weight, in the markets, and neither did the reversal of the 0% Leading Indicators that printed in June that saw July's print rise .6%...   But the Bloomberg Economic Expectations Index was a negative -5. So, a mixed bag of data, and nothing to shake the markets out of their Tapering Coma.

There were some developments in the Emerging Markets yesterday, and any recovery by the Emerging Markets should be seen as a negative for the euro, franc, and yen.  Let's start in Brazil, where the Brazilian real has been circling the bowl for over a month now. The Brazilian Central Bank (BCB) announced a $60 Billion intervention program in an effort to stop the real getting flushed.  Talk about changing horses in the middle of the stream! It wasn't that long ago that the BCB was selling real to weaken it! I don't know if $60 Billion will prove to be enough, given all the damage the BCB and Brazilian Gov't imposed on the real the past couple of years. But it does show that these two partners in crime, aren't going to sit back while the real gets flushed down the toilet.  The real had fallen 9.1% VS the dollar in the past month alone, so I have to hope that this isn't a case of remembering that your main job was to drain the swamp when you're up to your rear end in alligators!

The real responded by wrapping a tourniquet around the open wounds and the bleeding stopped. for now. I'm not saying that this won't work, I'm just questioning why so late in the game?  If it does work, then I would think that the Emerging Markets like Mexico, Colombia, Turkey and India would benefit. I just dislike Central Bank interference to begin with. but, the BCB started this mess by implanting measures to weaken the real, now they have to find ways to reverse those weakening measures. If they had just kept their hands out of the cookie jar to begin with! I'm just saying.

OK. enough of that!  European Central Bank (ECB) Governing Council Member, Nowotny, was talking up the euro overnight, by saying that "the stream of good news in the Euro are meant that there were not many arguments now for a rate cut."  It was just a few weeks ago, that another ECB member was calling for a rate cut. So. they aren't singing from the same song sheet, and whoever sings the loudest gets the markets' attention!

I would add that if you went back in the archives you would find that I was vehemently against the last rate cut, so you can guess that I was not happy when I hear the rate cut comment a couple of weeks ago! But then I was on the beach, with a straw hat on, a bloody Mary in one hand and book in the other. I gave it about two seconds of thought, and went back to my vacation mode!

So, the U.S. stock market had a technical glitch yesterday and shut down the NASDAQ for a short period of time.  I guess more than a few people panicked when first hearing about the shut down. No worries, it was just a technical glitch, you know like the kind you have at home! HA! I guess they had to turn the computer off and turn it back on! HAHAHAHAHA!

And guess what's going on our West but without Big Ben Bernanke? Yes, it's that time of the year again, for the Jackson Hole Boondoggle. This accumulation of Central Bankers, economists, and other big rollers, has been known to produce some great quotes, but without Bernanke there this year, the whole thing will probably be a big dud. So, let the boondoggle begin!

Long time readers know that I truly enjoy reading the stuff by David Rosenberg, the chief economist at Gluskin Sheff.  Rosenberg, and Stephen Roach are two of the best economists that I read whenever I get the chance. Well, Rosenberg just issued a new piece where he's calling for stagflation here in the U.S.  let's listen in.

"My sense is that once this consumer deleveraging cycle is over, and there are signs that it is coming to an end if it hasn't ended already, you're going to see the velocity of money start to rise, against the backdrop of double-digit growth of the monetary base, and that is going to lead to inflation down the road. "

He then goes on to say, former Fed Chairman Paul Volcker spent four years and two severe recessions killing inflation for good and in the mid-1980s bond yields fell out of double-digit terrain.

"Fast forward to today, and we don't have Paul Volcker, we have a Ben Bernanke-led Federal Reserve and we do not have the most anti-inflationary policy in modern history, we have the most pro-reflationary monetary policy that we've seen in at least seven decades."

Great stuff! And will, as I believe, proved  to be bang on!  And one of the reasons I believe Gold will remain viable and even rally in the face of Fed Tapering. Yes, there will be a lot of back and forth going on in the Gold price, but I feel as though the strong demand that continues to underpin the shiny metal's price, will win out VS the tapering bugs.

Speaking of Gold. After rising about $7 yesterday, the shiny metal is off by $2 this morning.  And Silver is hanging on to $23 this morning.

Another thing that always comes into play with the dollar's value VS Gold is the debt. Yes, I call this "an inconvenient debt" because no one in Washington D.C. wants to talk about it. And with it being a Friday, and I put the link to the Debt Clock in the currency roundup, it's important to remind everyone that here in the U.S. we passed the debt ceiling a long time ago. And that the U.S. has implemented extraordinary measures to pay the bills. But soon those "extraordinary measures" are going to run out. Then what? Oh, come one, we all know what comes next. We'll kick the can down the road further, raise the debt ceiling, and everything will be just hunky dory. 

I know I've told you this before, but for those that missed class that day, or for new readers. Imagine you come home from work to find your house and every house in your neighborhood is experiencing sewage backup, and it's about to blow your roof off. Do you simply raise the roof? Or get a shovel and start to work?   It's the same with our debt ceiling folks. but apparently our lawmakers think it's better to raise the roof and live with the sewage.

For What It's Worth. Another guy that I read whenever I can is William Pesek of Bloomberg. He concentrates on Asia, so when he wrote an article for Bloomberg on Japan, I had to go and pick it up!

"Haruhiko Kuroda doesn't wear a wizard's hat when he arrives at Bank of Japan headquarters each morning. Once inside, I do wonder if he dons a cloak, waves a magic wand and concocts mysterious potions.

Kuroda has done something truly supernatural in his five months as governor of the central bank. The more yen he conjures up to produce inflation, the more he mesmerizes markets. Investors are more bewitched by Kuroda than they are by the number 1,000,000,000,000,000. The 15 zeros now needed to express Japan's national debt almost have a dark-arts quality all their own. Yet a week after Japan's IOUs reached the 1 quadrillion yen ($10.28 trillion) mark, yields have actually declined.

What is Kuroda's secret? Ben Bernanke at the Federal Reserve would love to know as he fends off bond vigilantes, that mysterious cast of characters who protest fiscal or monetary policies they deem dangerous. Kuroda is winning bond land's full obedience with two forms of trickery. The first is what economists call "financial repression" -- essentially transferring money via monetary policy from citizens to the government. The second is outright monetization of public debt.

[How long this lasts] depends on how long investors are willing to suspend their disbelief over the facts in Japan: an impossibly large debt load, an aging population and a propensity for political paralysis. Were that moment of clarity to arrive, the global economy would be shaken by the worst debt crisis in history. Forget Greece -- Japan's debt burden is larger than that of Germany, France and the U.K. combined." - William Pesek

Chuck again. Yes, all stuff that I've been telling you about Japan and why I thought the yen was overvalued. I see the yen is weaker again this morning, and moving back toward 100, which is the right direction in my opinion!

To recap. The bias to buy dollars remains in the currency markets although the bias isn't very strong, and could change in a heartbeat. The Brazilian Central Bank announced that they were going to intervene in the currency markets to support the real and use a $60 Billion fund to do so. Chuck questions if that will be enough, given all the damage the BCB and Brazilian Gov't has done to the real previously. But the announcement could be good news for the Emerging Markets.

Currencies today 8/23/13. American Style: A$ .8990, kiwi .7775, C$ .9470, euro 1.3355, sterling 1.5575, Swiss $1.0810, . European Style: rand 10.21, krone 6.0635, SEK 6.5230, forint 224.65, zloty 3.1660, koruna 19.2050, RUB 33.04, yen 98.95, sing 1.2815, HKD 7.7555, INR 63.54, China 6.1710, pesos 13.03, BRL 2.4335, Dollar Index 81.55, Oil $105.23, 10-year 2.88%, Silver $23.07, Platinum $1,541.60, Palladium $753.10, and Gold.. $1,374.40  and here's the link to the U.S. Debt Clock, you should take your weekly peek at it by clicking here.

That's it for today. Not a lot of news this morning that's fit to print. I sure wish the cable news would take that mantra to heart! I participate in a fantasy football league, and our draft is tonight, it's usually a fun time. And next weekend is Labor Day weekend! Can you believe that?  And college football will start! YIKES! Where did the summer go? We had a full desk yesterday.. WOW! Congrats to our colleague in World Markets, Mike Harrell, who celebrates his 10 year anniversary with EverBank tomorrow. I've been here the longest, then Jen, then Christine, Chris, Mike Meyer, Ty Keough, Tim Smith, Aaron Stevenson, Mike Harrell, Antione Lawrence, and finally Dane Moody.  A fabulous group of people I must say! And with that, I thank you for reading the Pfennig, and Hope you have a Fantastico Friday!

By Chuck Butler

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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