China Wants A Bigger Role In The Markets.
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In This Issue.

* The dollar hammers all who challenge!.

* Chuck shows some Fed math, oh boy!.

* Chinese Third Plenum at first take is disappointing.

* Canadian data surprises on the upside .

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

China Wants A Bigger Role In The Markets.

Good day. And a Wonderful Wednesday to you! Well, it appears that I got out of Dodge just a little too late, but still ahead of the crowd! I started my car yesterday morning that was covered with sleet from the night before, and it was 27 degrees. I stepped off the plane 4 hours later and it was 89 degrees! I sure felt stupid wearing my St. Louis Rams pullover and EverBank hat that was used to keep me warm in St. Louis! But I didn't care! It was warm.

The Currencies tried to warm up a bit on Tuesday, but the metals decided to stay at home, and lose a few more shekels. The euro gained about ½-cent on the day, but gave some back overnight. The rest of the usual suspects that rally when the euro rallies found it difficult to rally, but did better than they did last Friday! Of course Friday's action wouldn't be that difficult to top!

The euro, as I just told you, has given back some of the gains it made yesterday, about ¼-cent, due to the markets getting jittery about the Industrial production report that's due to print. Basically, they fear what they already know. That the Eurozone economy has slowed to crawl, and they decided to use this Industrial Production print as their verification of that thought. There are a ton of other things that go along with a weak IP print folks. Should IP print as weak as expected, the markets will immediately go into "The ECB is about to provide stimulus" mode.

The European Central Bank (ECB) still has some arrows in its quiver to use on the slowing economy. They could introduce another round of LTRO bond buying, or they could introduce negative interest rates, to get people spending, or they could introduce both! Knowing what I know about the ECB, I think they'll wait until the last possible minute to step in with more stimulus..

From the looks of things, the markets won't take kindly to additional stimulus measures, and that's a change from their previous stance, when they rewarded currencies from countries that did stuff to promote growth. Look no further than the U.S. dollar folks. The Fed, even though the Sword of Damocles hangs over us in the form of Tapering, still is adding $85 Billion in stimulus per month, and the markets that once thought this was a bad idea, now believe it to be the cat's meow.

So, conflicting responses from the markets, eh? Ahhh grasshopper, that's what Mr. Markets, as my friend, Bill Bonner calls them, does. If we all understood exactly what Mr. Markets had in store for us, then we'd all be rich, rich I tell you, rich! HA! Of course it would help Mr. Markets if the Central Banks and Governments of the world would stop sticking their hands in the cookie jar, and acting like they know what they're doing! All this meddling in the economy and the markets is akin to the old saying about too many cooks in the kitchen.

Speaking of Central Bank meddling. A dear reader sent me a note from an article written by a Professor at Columbia U. In this article she outlines some math that I think most people would be interested in seeing. I mean, noting excites the human mind like math! HA! But here is the dilemma for the Fed. "The Fed is currently one of the most leveraged banks in the world. It has equity capital of just 55 billion US Dollars and total assets of 3'575 billion US Dollars - a leverage of 65 to 1. Rising rates could very quickly lead to negative equity for the Fed. For example, the current duration of outstanding government bonds is a little bit over 6 years. The Fed currently holds roughly 2 trillion US Dollars of government bonds. Given the rise in interest rates since May of 0.9%, the loss in market value of this bond portfolio alone amounts to 108 billion US Dollars. Thus, if the Fed were forced to mark its asset portfolio to current markets, it would have to show negative equity and be declared bankrupt if it were a private business." - Katharina Pistor

Yes, I know, not only doesn't the Fed, but also the U.S. Gov't, have to use accounting that is required by U.S. corporations. And the Fed can't go bankrupt, as long as they own a printing press, as Big Ben reminded everyone before he was the Fed Chairman. But here's where the rubber might meet the road, folks. Should the markets ever look under the U.S. hood, like they do with the ECB, and everyone else for that matter, then the dollar would get taken to the woodshed and never return!

OK. Meanwhile, back at the ranch, grandma is holding off the Indians. Yes, there's other things going on in the markets besides all this. In fact, I've gone this far into the letter, and haven't mentioned the Chinese Third Plenum! Well, that was on purpose, for you see, the initial announcement wasn't as exciting as I thought it might be. Yes, China announced that they would see a bigger role in the markets, but they kind of left out how they were going to achieve that goal. they also left out quite a bit of other things that I was expecting from them. And the global growth markets didn't take too kindly to the leaving out of things, like liberalizing interest rates, and moving toward a floating renminbi!

But that's not to say we won't see these things as we go along in 2014 and beyond. Come on, markets, you know that doing something all at once is not the Chinese way! They prefer to be slow, and steady, and timely. So, I fully expect to see these things in the future. Remember, what Premier Li said earlier this year when he was elected. He pledged to open the economy to market forces and strip power from the government, saying at the time that "the process would be very painful and even feel like cutting one's wrist."

I want to thank my friends over at the 5 Minute Forecast, Dave and Addison, for using a piece of what I wrote yesterday about China in their letter. The "5" is a must read for me every day, and then when I see my name and what I wrote in my humble little letter, it just makes me smile!

Speaking of making me smile. My good friends, Mary Anne and Pam Aden, aka the Aden Sisters, were kind enough to use something that I wrote regarding the dollar losing its reserve status in their monthly letter! These two ladies are real sweethearts, and smart cookies! I think this is a first for me in their letter, so hopefully, they'll use what I write more in the future!

One of the currencies that has resisted the dollar's hammering has been the Canadian dollar / loonie. While the U.S. was printing their baked and massaged Labor report, Canada was printing their own version.. There's doesn't have all the hedonic adjustments, so what you see is what you get in Canada. And what we got was a strong move upward in job creation for the month of October. In addition, Canadian housing starts rose to a 5-month high in October, which was totally unexpected. So things are looking up in Canada. As far as these two reports are concerned, and that has helped the loonie to resist the U.S. dollar's hammering..

Hey!, I know you'll all be able to sleep better tonight knowing now that Finland has changed their tune and will remove the language about leaving the euro. Whew! That was a close one! HA!

Inflation is soaring in India, and the Reserve Bank of India (RBI) sits and watches the economy burn. Where is the RBI with emergency rate hikes? Or better yet, where was the rate hike at the last meeting? This is a classic example of when a Central Bank should do something with rates. Or better yet, get rid of the Central Bank, and let the markets decide what interest rates should be. I betcha that rates here would have been higher and squashed inflation long ago, if that were the case! But, the rupee is the thing that is taking all this on the chin, folks.

For What It's Worth. Well, for today's FWIW, we're going to go back in time, and live out a little history, that's now come to light. I found this on zerohedge.com and quite frankly, even though it took place 40 years ago, the same sort of shenanigans is probably still being played with Gold today, if you ask me!

"Below is a memo written in 1974 by Sidney Weintraub, Deputy Assistant Secretary of State for International Finance and Development, to Paul Volcker, when he was still just Under Secretary of the Treasury for Monetary Affairs and not yet head of the Federal Reserve. The source of the memo was found in the National Archives, RG 56, Office of the Under Secretary of the Treasury, Files of Under Secretary Volcker, 1969-1974, Accession 56-79-15, Box 1, Gold-8/15/71-2/9/72. No classification marking. A stamped notation on the note reads: "Noted by Mr. Volcker." Another notation, dated March 8, indicates that copies were sent to Bennett and Cross. It currently resides in declassified form in Document 61, Foreign Relations Of The United States, 1973-1976, Volume XXXI Foreign Economic Policy, and is found at the Office of the Historian website.

The memo is a continuation of the US thinking on the issue of the then brand new SDR, the fate of paper currencies, and the preservation of US control over reserve currency status. Most importantly, it addresses several approaches to dominating gold as well as the US' interest of banning gold from monetary system and capping the free market price, contrasted by the opposing demands of various European deficit countries (sound familiar?) on what the fate of gold should be at a time when the common European currency did not exist, and some European countries were willing to fund their deficits with gold: something the US naturally was not happy about."

Zerohedge.com broke the memo up into two punch lines that I'll highlight now. here we go..

"U.S. objectives for world monetary system-a durable, stable system, with the SDR [ZH: or USD] as a strong reserve asset at its center - are incompatible with a continued important role for gold as a reserve asset.... It is the U.S. concern that any substantial increase now in the price at which official gold transactions are made would strengthen the position of gold in the system, and cripple the SDR."

And. "To encourage and facilitate the eventual demonetization of gold, our position is to keep the present gold price, maintain the present Bretton Woods agreement ban against official gold purchases at above the official price and encourage the gradual disposition of monetary gold through sales in the private market. An alternative route to demonetization could involve a substitution of SDRs for gold with the IMF, with the latter selling the gold gradually on the private market, and allocating the profits on such sales either to the original gold holders, or by other agreement.... Any redefinition of the role of gold must be based on the principle stated above: that SDR must become the center of the system and that there can be no question of introducing a new form of gold- paper and gold-metal bimetallism, in which the SDR and gold would be in competition."

Chuck again, Ok, I know that was quite long today, and I apologize, but I felt it had to be done this way and not broken up into two days. The saving grace here for us is that SDR's never took off and became the end-all of reserve currencies.. But, if the U.S. and the IMF were thinking this 40 years ago, don't you think they are still thinking about this? I do.

To recap.. The dollar continued to hammer on most currencies and metals yesterday, with the euro finding some room to gain, but giving back ½ of those gains overnight, as the markets await the Industrial Production print in the Eurozone. China's Third Plenum was disappointing, but only to those that thought China would go hog wild and announce all their changes at once! I believe we'll need to wait for them.. and Chuck highlights some Fed math, which is scary!

Currencies today 11/13/13. American Style: A$ .9295, kiwi .8220, C$ .9535, euro 1.3420, sterling 1.5955, Swiss $1.0895, . European Style: rand 10.3680, krone 6.2030, SEK 6.6890, forint 222.70, zloty 3.1330, koruna 20.1630, RUB 32.90, yen 99.55, sing 1.2495, HKD 7.7535, INR 63.29, pesos 13.17, BRL 2.3275, Dollar Index 81.18, Oil $93.32, 10-year 2.76%, Silver $20.81, Platinum $1,434.60, Palladium $739.67, and Gold. $1,275.60

That's it for today. For once in my life, I had a fairly painless and on time trip! WOW! No delays, no rushing through airports because of one thing or another, just plain and simple easy traveling. The sun is rising in the East, I love watching either the sunrise on the water or sunset on the water!. Another very wordy Pfennig this morning.. Oh well, one of these days, I'll just say Hi and bye, to make up for these long Pfennigs! HA! Last Saturday night, I got to spend some time with my buddies from my football playing days! It was great to see, Robin, Dean, Ray, and the birthday boy Stan. And last Friday night, I finally was invited to Chris Gaffney's house! He's been to my house probably more times than you can shake a stick at, but I hadn't been to his house until last Friday. Of course, he has been "updating" his house for the past 10 years.. And brother did he do a great job! WOW! OK. I'm going to go sit on the deck and drink my coffee and watch the sunrise. I hope you have a Wonderful Wednesday!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837





Posted 11-13-2013 3:28 PM by Chuck Butler