A Shrinking Balance Sheet For The ECB.
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In This Issue.

* Currencies & metals rally on Tuesday.

* But turn around on Wednesday.

* Aussie inflation prints higher than expected! .

* BOC to leave rates unchanged & disappoint again! .

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

A Shrinking Balance Sheet For The ECB.

Good day. And a Wonderful Wednesday to you! Well, Game 1 of the World Series will finally be played tonight. I really have no idea why they had to wait so long to start the World Series, I guess they wanted to see snow for a game or two! UGH! In the "old days", of which we'll use when I was a kid, the World Series would be over by now, and. all the games would have been played during the day, when at least the sun is out and the temps are a bit warmer! Major League Baseball is always trying to figure out why young kids are attracted to baseball anymore. Well. Playing the Championship games so late at night that the kids can't watch them, could be a Big reason, eh?

About an hour after I sent the Pfennig off for distribution yesterday, the Jobs Jamboree took place, and while it was neither bad or good, it surely lit a fire under the currencies and metals to send them soaring against the dollar. The BLS said 148,000 net jobs were created in September. The Unemployment rate slipped to 7.2% from 7.3%, but we all know that this has more to do with people dropping out of unemployment for good, rather than them finding jobs. I had told you that the so-called "experts" thought that 180,000 jobs would have been created in September, so when 148,000 printed, the markets took it as a sign that the Fed would view this as a need to continue Quantitative Easing / QE, and further delay their "Taper Capers". And the currencies and metals soon began to kick sand in the dollar's face once again.

The euro soared through 1.37, and before I could gather my 2nd cup of coffee, the single unit was pushing a full 1-cent figure move on the day! The euro is now the best performing currency VS the dollar in 2013. I'm sure a lot you were beginning to think the euro's days were long gone and thought the Bruce Springsteen song was all about euros. Glory days, they'll pass you by, glory days, in the blink of a young girl's eyes, glory days, glory days. But you would be wrong!

I got to thinking yesterday morning about the euro, and yes, I still hold the thought that by nature of the euro being the offset currency to the dollar, it gets an extra boost or slap depending on how the dollar is performing. But, fundamentally speaking, the relative calm that has come over the Eurozone for almost 2 years now, is going a long way toward euro strength. So too is the fact that the European Central Bank's (ECB) balance sheet is shrinking! Yes, while the Central Banks in the U.S. , UK, and Japan are all seeing their balance sheets expand, the ECB's balance sheet is shrinking. To me, that's huge, for I don't know how many times over the years, I've explained to people that the best way to view a currency is to look at the currency as the stock of a country. And then use the same criteria you use to value a stock. The balance sheet, the leadership, the yield, the ability to attract attention, ability to sell something, etc.

So balance sheet is a key fundamental. And the euro holds the trump card over the U.S., UK, and Japan on that one! So, the euro strength is not all about dollar weakness, it has some of its own merits to stand on!

But the rally in the currencies and metals was so yesterday. Today, both asset classes are giving back some of those gains from yesterday, as it appears to me as though traders got ahead of themselves yesterday, and have decided they moved too far, too fast. You would have thought, given yesterday's price action, that we could finally get to a general trading trend, and stop all this go, stop, go, stop! But NOOOOOOOO!

I have Doucette playing Mamma Let Him Play to get me started this morning. A good engine revving song for sure! I'm looking at the cross currency screen this morning, for something look awry, and there it is right in front of me! Japanese yen is rallying not only against the dollar this morning, but also the Aussie dollar (A$) and New Zealand dollar /kiwi. Generally speaking, whenever this happens, it's an indication that carry trades are being reversed. To reverse a carry trade, the investor simply reverses what he did to begin with, so that would mean, the investor would buy yen, and sell the cross currency, in this case A$'s or kiwi. I have no idea why investors would be closing out their carry trades, unless. They reached their target gains. But so many at once? Appears to be fishy to me. I'll have to do some additional look-see on this.

Yesterday, I really was just checking if you all were paying attention in class two weeks ago! HA! OK, so yesterday, I talked at length about the currency swap agreement that China had signed with the UK, and then mentioned that it would be really BIG when China signed with the Eurozone. I then talked about the dollar being next in line, and so on. But some very astute and dear readers, sent me notes pointing out that I already reported that the Eurozone was on the Chinese roster, on October 10th! So. Like I said, I was just checking to see who was paying attention in class that day! Yeah, that's the ticket! My second car is a formula 1 race car that I take out on Sundays, Yeah, that's the ticket! HA!

I apologize if I confused you yesterday. That wasn't my intention, I guess I just got so wound up about the UK signing with China that I started thinking about the next BIG Deal, and got carried away. Either way, China is really adding to their roster of countries that have agreed to exchange currencies in trade, thus removing the dollar from the terms of trade. What this does folks, in case I've not explained it before, is remove the need for Central Banks to hold huge sums of dollars in reserves that used to be used to facilitate trade. They are no longer needed. I feel for the dollar, for I too believe that the time is coming soon for me to hear those words. But that's neither here nor there. Why did you even bring that up, Chuck? Up, Chuck. now that's funny!

What I should have been telling you about was that China signed a currency swap agreement with Singapore! So, again, sorry for the confusion.

After a day when the Chinese marked down the renminbi, which I believe they do from time to time just to remind the markets that the renminbi trade is NOT a One-Way Street, the Chinese got back to allowing the renminbi / yuan to appreciate, and last night's move was large enough to reverse the previous night's downward move, and allow the currency to reach a new 20-year high VS the dollar.

I had a dear reader send me a note yesterday asking me to explain why I believe that inflation will become a real problem with the loss of the reserve status for the dollar. No worries. You see, a currency's strength goes a long way toward combating inflation, as it does not allow inflation to enter a country from another country in trade. The dollar has lost a lot of ground in the past 11 years, but nothing like I believe we'll see when it is no longer the reserve currency of the world, and that great loss of value will allow other countries to export their inflation to us. There are a host of other things that will occur, but this addresses the inflation question. I hope!

Speaking of inflation. Australia printed their 3rd QTR CPI (consumer inflation) report last night and CPI printed higher than expected at 2.2%, which I told you yesterday, if that happened we could very well see additional A$ strength. And we did at first, with the A$ pushing up to .9758, before the carry trade reversals kicked in, and the A$ lost nearly a full cent! This is probably a good thing for the A$, given all the one-way upward direction we've seen lately in the currency. Let those that need to take profits, take them, and be gone!

I saw a report from a major research team calling for a delay in the Fed's Taper Capers to April 2014. Of course if you subscribe to the Marc Faber call of Tapering never happening. Then the April date is funny stuff. Taper Capers. The Big Boss, Frank Trotter, and I have said for a couple of years now that we believed the Fed had painted themselves into a corner, without an exit strategy. We even have a slide that we use in presentations that illustrates a man that has painted himself into a corner. So, when someone like Marc Faber says the same thing about having no exit strategy, I sit back and think, maybe, just maybe, one day, the public will demand something better. Maybe.

The Bank of Canada (BOC) meets today, and I don't think what BOC Gov. Poloz has to say will be any benefit to the C$/ loonie. I think that Poloz will keep rates unchanged, but announce a downgrade of the BOC's outlook for the economy. The tightening bias will remain, but what good has it been to have a tightening bias for 2 years? I've talked about this over and over again for some time now. The BOC played games with the markets when they continued to talk about removing accommodation. But when nothing ever came of the talk, the markets left. That's when the C$ / loonie fell from parity to the current level of 96-97-cents. I believe the markets have given up on the BOC and their so-called "tightening bias". Tightening, Schmightening!

In addition, now. Oil isn't helping the C$ / loonie, as black gold, Texas Tea, has really dropped in price. So, be careful with loonies folks. I'm still waiting for Poloz to show his true colors with the loonie, maybe he will refrain from allowing his background in trade enter into the equation here. Maybe.

Well Gold had a good day yesterday. The shiny metal had gained $26 when I left for the day. Unfortunately, this morning it has gotten caught up in the profit taking going on in the currencies, and the dollar strength has pushed Gold down $10.

And U.S. Treasuries are seeing a huge rally this past week, recovering lost ground since we kicked the debt debacle can down the road. And now with the markets beginning to believe that the Fed is on hold until next April with their Taper Capers, Treasuries are rallying even more! I just sit here and shake my head in disgust, and alternate banging my head on the table, as I just don't believe the bond bubble hasn't found the pin in the room yet. It got close a couple of months ago, but averted it once again, allowing more air to be pumped into the bubble, which means that when it does find the pin, the pain will be even greater!

The veritable Whitman's Sampler AKA The U.S. data cupboard had to make some corrections to what it previously showed as having ready for us today. Recall, that I told you that Retail Sales would print today, but now, that's changed. I can't even find Retail Sales on the calendar of Economic releases that were delayed due to the Gov't shutdown. Yesterday's data cupboard had the jobs jamboree, and the Net TIC Flows (net foreign security purchases), was interesting in that it showed an outflow of $8.9 Billion in August. That means, we really didn't sell enough in August to finance our deficit. In fact the flow was outgoing, not incoming. Uh-Oh. I can't believe the markets don't pay attention to this data set any longer. To me, it's quite telling.

Oh. And for those of you keeping score at home, the Avg. Hourly Earnings increased .1% in September, and the Avg. Weekly Hours Worked remained steady at 34.5. In addition, the labor participation rate remained at 63.2%... We're still stuck in the Carter years here with labor, and that's why it all feels icky. Those years were tough.

The Black Keys are singing their hit song, Lonely Boy, right now, and I look around the empty office and sing along, because at this time of day, I am a lonely boy! HA!

For What It's Worth. I found this on Ed Steer's letter ([email protected]) And since I talk about physical demand for Gold (& Silver) all the time, I thought it would be good to see that someone else is on top of this like me. Actually, Eric Sprott, is far out ahead of me on this stuff. So, let's see what he had to say on Ed Steer's letter today.

Gold demand statistics reported by the World Gold Council "consistently misrepresent reality" by understating metal flowing to Asia, Sprott Asset Management CEO Eric Sprott charges this week in an open letter to the council.

Challenging the WGC's data compilation, which relies on methodology of the GFMS consultancy, Sprott calculates that annual gold demand is actually running 3,000 tons greater than mine supply.

Sprott writes: "I urge the leaders of the World Gold Council, for the benefit of their own members, to improve the quality of their data and find alternative sources than the GFMS, which paints a misleading picture of the real demand for gold. This lack of quality information has certainly been one of the driving factors behind the lack of investors' confidence toward gold as an investment. Gold has been one of the best-performing asset classes since 2000 and the World Gold Council should be promoting it accordingly."

Chuck again. Yes, if the proper demand figures were out there, I would think we would see even more demand, and I keep saying over and over again that when physical demand becomes so burdensome on the paper holders, they will cave and thus end manipulation. So, having correct demand figures is important, and I thank Eric Sprott for taking time to point this out to the World Gold Council!

To recap. The Jobs Jamboree disappointed the markets as only 148,000 jobs were created in September, thus setting off a HUGE currency and metals rally that lasted throughout the day. That rally has turned around this morning though, as profit taking or just a fear of moving too far, too fast set in. Yen rallies VS a number of currencies, thus indicating that the Carry Trade was reversed. Aussie inflation was higher than expected, and the Bank of Canada meets today, and Chuck has grown tired of their disappointments.

Currencies today 10/23/13. American Style: A$ .9620, kiwi .8375, C$ .9690, euro 1.3755, sterling 1.6150, Swiss $1.1180, . European Style: rand 9.8045, krone 5.9205, SEK 6.3870, forint 212.30, zloty 3.0380, koruna 18.7690, RUB 31.79, yen 97.35, sing 1.2395, HKD 7.7530, INR 61.58, China 6.1330, pesos 12.95, BRL 2.1865, Dollar Index 79.35, Oil $97.24, 10-year 2.49%, Silver $22.55, Platinum $1,436.70, Palladium $747.45, and Gold. $1,331.89

That's it for today. Boy the TV guys are sure talking up my Missouri Tigers (Mizzou) I sure hope that doesn't jinx them, for up to now Mizzou has flown under the radar screens to jump up and strike. Just leave us alone. Jen asked me yesterday if I was doing OK without cake donuts, as no one has taken the "memo" to heart. I find that to be really cold, Willis. Matthew Sweet is playing right now.. Chris and I took our wives to see Mathew Sweet 20 years ago at a nightclub on the landing. Good memories. Where did those 20 years go? Wow! Our little Christine returns today, that should liven up the desk! I'm late getting this out, so I had better tie up in a bow and get it out the door. I hope you have a Wonderful Wednesday!

Chuck Butler
EverBank World Markets

Posted 10-23-2013 12:35 PM by Chuck Butler