The World Is Drowning In Debt…

November 13, 2018

* Currencies & metals continue to get sold

* Oil’s rally is short-lived! 

Good Day… And a Tom Terrific Tuesday to you! I was remiss yesterday in not mentioning that our Blues had gotten their hats handed to them by the Wild on Sunday… I was not following that game, so it took a dear reader to bring that to my attention… Tomorrow night they play the Blackhawks, a HUGE rival, so they have an opportunity to get back on their skates! Go Blues! Things were moving along nicely here, but then ground to a complete stop… Come on guys! I need to get this project completed! The creator of Spider Man, Stan Lee, died yesterday, my he rest in peace. And The great Otis Redding greets me this morning with his song: I’ve Been Loving You… This was a live recording from the famous Whiskey A G0-Go… I met up with a bond trader from New Zealand at the Whiskey A Go-Go years ago, and while I waited for him to show, I kept thinking of Otis Redding singing his songs there…

OK… Yesterday, I told you that the political fears from the Eurozone and the U.K. had put the currencies on a spiral spin downward since Friday. And yesterday, the spiral didn’t stop, and the currencies moved further downward. Like I mentioned yesterday, I find this interesting that the traders are being myopic with these fears, and not looking at the U.S. political situation and not see the potential for nothing but gridlock for the next two years. I remember in 2007, the best marketing person I had ever seen, David Galland, wrote that “if you thought the previous administration were spend thrifts, you haven’t seen anything yet when the new group gets into office”… Boy was he correct… but then most of you longtime readers know how much debt was added the next 8 years, because, I told you!

I bring this up because the world is drowning in debt, and not just countries, but the people that make up those countries are too in debt up to their eyeballs. Last week, I talked about how a year ago we were talking about a Tent Revival for Global growth, and now that has faded, quickly… Here’s David Rosenberg’s take on this crashing of Global Growth from his Twitter page…

“OECD leading indicator fell in September for the 10th straight month. The YoY rate started the year at +0.45%; now stands at -0.82%.”

In case you’ve forgotten… The OECD stands for the Organization for Economic Cooperation & Development. They work Globally with countries to promote growth, and they issue this Leading Indicator of Global Growth, that’s discussed above.

I received an email from a dear reader who asked me, “why are the Fed insisting that interest rates need to go higher, when, as you’ve pointed out the slow down of the economy has already begun?”

Instead of just answering him directly, I thought it best that everyone know this… The Fed has been hell bent and whiskey bound to hike rates, so that they have enough rate to cut when the recession begins… In the past, the Fed has cut interest rates on average around 4% during recessions… And the average rate going into a recession was 6.5%… The Fed is currently at 2.25%, they are going to have to aggressively step up the pace of their rate hikes, or they’ll meet up with the next recession, and won’t have 4% of rate to cut… Which means… They’ll have to implement another round of QE… Or even worse, introduce negative deposit rates here in the U.S.

So, that’s why the Fed hasn’t paid attention to the rot on housings vine, the increase of debt by consumers, the stock market bubble, or the weaker by the print of data reports, and instead continue to hike rates…

I’m not trying to deflect the problems for the currencies and metals folks, I’m just pointing out that it’s not a sunshine, lollipops and rainbows for the U.S. economy and the Fed… And so, I continue to wonder why none of this is entering into traders collective minds right now…  And here’s another thing that traders should be looking at as potential problems for the dollar… 

We have the different payment systems around the world that are dealing the dollar a blow, as the use of the dollar by foreign banks dwindles… The different payment systems, there’s one in Europe, (SEPA), one in China (CIPS) and one in Russia (MIR) have all been created to eliminate 1. The dollar, as a reserve currency and 2. The power of the U.S. to administer sanctions through SWIFT.

Speaking of SWIFT… In December 2015, the U.S. controlled 43.89% of transactions through SWIFT, and the Eurozone had 29.39%… Just two years later, in December 2017, the euro had cut into the dollar’s control of SWIFT… The U.S. was at 39.85%, and the Eurozone was at 35.66%…

Here’s a clip from the Financial Times… “One consequence of the America First policies of US President Donald Trump will be to create a bipolar financial world, with China at one end and the US at the other. That will mean smaller financial flows between the two, and a much more robust effort from Beijing to eventually challenge the dollar’s status as the world’s reserve currency. That, in turn, potentially has implications for everything from the status of US Treasury securities as the safest assets in the world to how oil is priced.

“The Trump administration’s “America First” policy will encourage a long-term move away from the US dollar,” according to Christopher Wood of CLSA, the arm of Beijing-based Citic Securities, pointing to “the growing American practice of using the dollar as a weapon via the implementation of sanctions and the like.”

Chuck again… These things scare me folks… about 8 years ago, the Chinese issued a statement saying that they no longer had the need to accumulate dollars in reserve… And they’ve been true to their word, with their lower and lower amounts of Treasury holdings… They haven’t gone “all-in” like Russia did with their Treasury holdings, and I don’t expect China to even undertake thinking about doing that, but choose instead to do it stealth-like, and hope that it goes unnoticed… But, I see it, and when I see things I write about them, and hopefully you read them and think about what this all means for the dollar, as the reserve currency of the world.

So, as you can see, there are plenty of problems out there that traders could be very worried about with regards to the dollar, but… Right now, they choose not to worry about that right now… Reminds me of Alfred E. Neuman… “What me worry?”  Ok, youngsters, you’ll have no idea who I’m talking about here, so Google his name or Mad Magazine… 

OK, so the currencies got whacked again yesterday, what about Gold? Well, it didn’t fare much better, losing $9.50 on the day, and falling below $1,200… I’m shaking my head in disbelief right now as my fat fingers fly across the keyboard… Physical demand for Gold is strong, but the shiny metal’s price direction is controlled by the short Gold paper trades…  UGH!

Well, Sears announced more store closings last week… It’s not been a good year for brick and mortar stores here in the U.S., but just when you thing we’ve got it bad… Someone else has it worse! Thanks to Dear Reader Bob, for sending this to me, but the U.K. has seen far worse numbers from their Retail Sector… A net 1,123 stores disappeared from Britain’s top 500 high streets in the first six months of the year, according to the accountancy firm PwC.

That’s an average of 14 stores a day… OMG!

And where has all that rhetoric from Bank of England (BOE) Gov. Mark Carney, about hiking rates gone? Long time passing… where have all the flowers gone, so long ago?

Russia continues to dedollarize… They are taking strides to eliminate the use of dollars… And I don’t know if you’ve noticed this or not… But after decades of mistrust between China and Russia, they sure seem to be snugging up these days, don’t they? Look… we as a country have ticked off both those major players in the world, with sanctions and tariffs, so it makes sense to me that they buddy-up. China has long said that the “dollar standard should end”… They began this dedollarization years ago, with their FX Swap Agreements with countries they did trade with, that essentially removed the dollar from the terms of transaction when they traded with each other.

The amount of dollars held in reserve around the world has fallen and has been falling for the last couple of years, but I would think that the tallies at the end of this year will show a HUGE drop… And that’s just the beginning folks… just the beginning…

The Price of Oil saw a brief rally yesterday after the Saudis announced production cuts, but that didn’t last too long, and President Trump, was once again pushing the Saudis for cheaper gas, and well, that’s what we have this morning, as the price of Oil is trading with a $58 handle! 

The U.S. Data Cupboard is pretty light on data prints the first part of this week, but tomorrow we begin with the Data Cupboard yielding a plethora of data, starting with Retail Sales for Rocktober… We’ll talk more about these reports tomorrow, just know that for today, there’s not much other than the Federal Budget Deficit that will print…

There will be 3 different Fed Heads speaking today, so we’ll see more singing from different song sheets by the Fed Heads… There was a time when this, going in different directions, would cause great pain for the dollar… But that’s when fundamentals ruled…

To Recap…  The dollar bugs continue to buy dollars, and sell currencies and metals, and traders say its because of the political problems in the Eurozone and U.K.  I say hogwash, those problems don’t amount to a hill of beans compared to the stuff that’s hanging over the dollar like the Sword of Damocles!  And I spend the rest of the morning pointing out these problems for the dollar! 

For What It’s Worth…  I mentioned the economic sanctions on Russia above and this was in Ed Steer’s letter today, so I thought, what the hey, why not use it for my FWIW… it’s about Germany calling an end to those sanctions and can be found here:

Or, here’s your snippet: “Dear Mr. Bystron, recently we have met at the International Conference on the Development of Parliamentarism in Moscow recently. In front of representatives of Parliaments from all around the world, international experts and journalists you held a well-received speech, calling for an end to sanctions against Russia. Why?

I demanded an end to sanctions because they have not achieved anything except harming German business. There’s no point to maintaining these useless sanctions any longer.

The Russian-German relations are very complex. On the political agenda, they are burdened with the sanctions which the E.U. countries imposed to Russia, but on the other hand, Germany and Russia cooperate on a strategic project such as North Stream 2. How do you see the prospect of developing further relations between your country and Russia, and also how the United States relations towards the possibility of greater convergence between Germany and Russia?

North Stream 2 is just one example of this.
But it’s no secret there is a lot of pressure from the United States to stop this project. There was a bipartisan initiative in the U.S. Senate in March supported by 39 Senators, urging the government to do everything it can it stop the pipeline.

Chuck Again…  I’ve long said that these sanctions have gone on long enough, and the idea that Europe may drop them will go a long way toward more trade between the Eurozone and Russia… 

Currencies today 11/13/18.. American Style: A$.7198, kiwi .6747, C$ .7555, euro 1.1250, sterling 1.2923, Swiss $1.010, European Style: rand 14.43345, krone 8.4939, SEK 9.0906, forint 286.71, zloty 3.8215, koruna 23.0623, RUB 67.66, yen 114.00, sing 1.3817, HKD 7.8292, INR 72.48, China 6.9595, peso 20.39, BRL 3.7429, Dollar Index 97.44, Oil $58.70, 10-year 3.17%, Silver $14.02, Platinum $844.48, Palladium $1,106.30, and Gold… $1,198.17

That’s it for today… I heard about more cold weather back home yesterday…  I’m just so glad I’m not there! Things here are pretty quiet, as the “yankees” haven’t begun to move back to the south for the winter just yet…  I’ve gotten past that bad stomach I had late last week, and have been feeling pretty good the past couple of days. Consuming rice and toast for a couple of days, usually does the trick for me, and this time was no different. Customer service in this country sinks… That’s all I’m going to say about that! My mom used to say that something “stinks to high heaven”…  That’s what customer service has come to being, folks…  Pink Floyd takes us to the finish line today with their song: Us And Them… I hope you have a Tom Terrific Tuesday, and continue to Be Good To Yourself! 

Chuck Butler