Hy Minsky For A Wednesday Chat
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In This Issue.

* Dollar rebounds overnight.

* RBA Dep. Dawg, fears ZIRP!.

* Bank of Canada meets today .

* SNB to defend cross rate.

And Now. Today's A Pfennig For Your Thoughts.

Hy Minsky For A Wednesday Chat.

Good Day!... And a Wonderful Wednesday to you! Well, the S.F. Giants brought out the big-boy bats last night, and whooped up on the Royals in Game 1 of the World Series, eh? A Royals fan that I know, sent me a text during the game and said, "I feel like the Royals are going to get swept!" I replied, "nah, they'll come back". But then I got to thinking about the 2005 Astros, and the 2007 Rockies, in their first visits to the World Series, and thought, well, maybe. The media interviewed Don Denkinger, as he was solely responsible for the Royals Championship, and he said that he "can live with the call". Well, isn't that just peachy! He may be able to live with the call, but I can't!

I also can't live with the calls being made right now in the markets. They just don't see the forest for the trees. They are standing too close to the trees to see the whole forest, is what that saying means, and it certainly applies to the economist, traders, and market participants that are calling for a multi-year rally in the dollar. Of course these are the same boys and girls that said the same thing about the dollar in 2005, 2008, 2011, and again now. Sooner or later, love is gonna getcha. No wait! Sooner or later, they'll figure out that once again they were wrong, and they'll tuck their tails between their legs, and crawl back into their caves, only to be heard from again, the next time traders get a wild hair about the dollar.

Of course, I told you all months ago that we could very well see a period of dollar strength, and that's what we're seeing, but for how long? And riddle me this Batman, if everyone is all-in on the dollar rally, when then do we have days like Monday and Tuesday, where the currencies and metals rallied?

So, that's a long-winded journey to get to today's trading. And the currency rally we saw on Monday and Tuesday is getting turned around today. The euro is leading the currencies down, on news that the European Central Bank is really going whole-hog on buying covered bonds. Yesterday it was French bonds, today it's Spanish bonds. It's not all-out Quantitative Easing / QE, but it's pretty darn close, and all-out QE is what hurt the dollar, hurt the yen, and hurt pound sterling, so why not the euro?

Overnight the Aussie dollar (A$) and N.Z. dollar / kiwi, both saw selling, but are attempting a rebound in the early morning trading. I was very interested in a speech that the Deputy Dawg, I mean, the Deputy Gov. of the Reserve Bank of Australia (RBA), Lowe, made overnight and caused some problems for the A$... Lowe, was talking about the rising concern at potential fallout from the ZIRP (zero interest rate policies) of the U.S. , Eurozone, and Japan. Let's listen in. "Very low global interest rates have been with us for some time. And it is likely that they will stay with us. But the longer it runs on without a pickup in the appetite for real investment, the greater is the potential for new risks to develop."

Yes, he's absolutely right! He must be a fan of the great economist, Hy Minsky! Because that sounds very similar to the economic thesis of Hy Minsky! Speaking of Hy Minsky, I noticed that my friend John Mauldin, dusted some thoughts of Hy Minsky's for his weekly letter last week. Good stuff, John! For those of you not familiar with Hy Minsky, shame on you! HA! Just kidding. I had the great fortune in my early years in the markets to be able to sit with Hy Minsky and act like a sponge, as he would speak. He always wanted my questions afterward, just to make certain I was listening. But for those of you not familiar with him, this is from John's weekly letter.

"Minsky's Financial Instability Hypothesis suggests that over periods of prolonged prosperity, capitalist economies tend to move from a financial structure dominated by (stable) hedge finance to a structure that increasingly emphasizes (unstable) speculative and Ponzi finance."

And to me. this is what we are experiencing now. the "speculative and Ponzi finance". The same thing was going on in 2006. It leads to what is called: "A Minsky Moment". Let me see if I still have this ingrained in my brain, as I go from memory. "a sudden major collapse of asset values which is part of the credit or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money. The spiraling debt incurred in financing speculative investments leads to cash flow problems for investors. The cash generated by their assets no longer is sufficient to pay off the debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. This is likely to lead to a collapse of asset values. Meanwhile, the over-indebted investors are forced to sell even their less-speculative positions to make good on their loans. However, at this point no counterparty can be found to bid at the high asking prices previously quoted. This starts a major sell-off, leading to a sudden and precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity, and a severe demand for cash.

Yes, I know, I'm walking a fine line here, in talking economics like this, but. I think it's important to understand why I'm always so adamant about the U.S. economy being weaker than everyone wants you to believe, and that the debt is going to hang over the U.S. economy like the Sword of Damocles until it either collapses or gets remedied.

Whew! That was quite the lesson today, eh? OK, class, for your homework assignment, you need to.. Just kidding! You all get a Gold Star today, for hanging through all of that!

So, as I said above, the currencies led by the euro are looking for a bid this morning as the dollar is back to pushing the applecart down the road. Bloomberg has a story this morning about the Swiss National Bank (SNB), so you know that would catch my eye. Well, it just so happens that The SNB Governing Board Member, Zurbruegg, was letting the markets know that the SNB "will with utmost determination make sure that the minimum exchange rate is not questioned, either with unlimited purchases of foreign exchange currency, and if necessary we will take further measures immediately."

OK, for those of you new to class, Zurbruegg is talking about the cross floor that was put in on the euro/ franc cross of 1.20, 3 years ago. The thing to think about here is that the euro has seen quite a bit of weakness lately, and that puts pressure on the cross, if the franc remains strong. So, what Zurbruegg is saying is that the SNB will buy euros to support the price and the cross should the cross come into question. Right now the cross is 1.2062, so it's not like it's really in question, but. I think Zurbruegg sees the writing on the wall for the euro, if the ECB continues to drag it through QE mud, and it's better to get this out in the open ahead of time, so it's not a surprise to the markets, like the initial setting of the cross floor was 3 years ago!

And recall that I told you about the Swiss Referendum that will take place at the end of November that would require the SNB to recall their Gold, and have sufficient Gold reserves to back (a percentage of) the outstanding currency? Well the first poll on the Referendum too place, and it showed a 45% in favor VS 39% opposed. Actually, I'm quite surprised at how close this is. It is the first poll. But still, 39% opposed to this? I'm shocked!

The Bank of Canada (BOC) will meet today, this morning, to be exact. I expect for all things to remain unchanged, as BOC Gov. Poloz, deals with the fact that since he took over the reins of the BOC leadership, the Canadian dollar / loonie has reached a 5 year low, and Oil prices, have plummeted. Of course he's not personally responsible for the Oil prices plummeting, but it's something that he has to deal with as the BOC Gov. Hey! Remember a couple of years ago, when Canada was the first G-10 country to raise interest rates? Good memories, eh?

I still like Canada, and the loonie, for I don't see the Oil price plummet going too much further and eventually turning around. Then things can get back to normal in Canada! But, for the meeting today, I don't see Poloz making the waters choppy, but going forward, he might be tempted to do so, IF the Oil price turnaround is still questionable.

The Chinese renminbi/ yuan was weakened overnight. After two days of appreciation, the renminbi/ yuan was weakened, thus letting us all know that the Chinese are still in teaching mode. Teaching the markets that they can't and shouldn't ever believe that a currency is a One-Way Street of appreciation. That, and the fact that the Chinese are hell-bent on seeing how volatility works in a currency. just baby steps to floating the currency, and moving it to the head of the class.

China is also going to begin to print a new labor report, that's going to take the place of the "registered urban jobless rate" that prints every quarter. I like the fact that China is looking to improve their data reports. Sure there could be some of that virus that the U.S. caught back in the 90's and continues today, that if you don't like the data, adjust it, or find a new report that tells it like you want . But, I don't think that's what the Chinese are after here.

Gold is flat to down a bit this morning. I find it really interesting that investors continue to shun Gold for stocks, it's like the Minsky stuff above. Investors opt for riskier investments in search of yield, instead of something like Gold that is a "store of wealth". The physical demand for Gold (& Silver, Platinum and Palladium) continues to be strong from the Asian and Middle Eastern Central Banks and investors. India had to announce that the curbs against imports were still in place after it was reported that they imported a HUGE amount of Gold in Sept. (we talked about that last week) Yes, it was a case of: "Go ahead and meet some demand an import some Gold but don't make it obvious we did that", only to have the imports go through the roof! Someone is in big trouble right now in India! But the point here is that the demand for physical Gold is strong, but isn't enough to offset the paper trades that price manipulators use.

The U.S. Data Cupboard, finally gets a Tier 1 report to print today, unfortunately it's the stupid CPI report. Yesterday, Existing Home Sales increased VS the previous month by 2.4%, thus reversing the -1.8% negative print from August. And why wouldn't homes be selling with mortgage rates dropping again? I'm so glad I have Satellite Radio in my car here, but last week when I was in Florida, driving my old car, without Satellite Radio, I hear radio ad after radio ad from mortgage lenders. I get a not so pleasant feeling when I hear those ads.

For What It's Worth.Well then. did you enjoy the piece I had in this section yesterday? It was a change of pace for sure. But no worries, if that wasn't your bag, Austin Powers, I'm back to the usual stuff today. This was on Reuters. here you go!

"JPMorgan, UBS and Credit Suisse were fined a total of 94 million euros ($120 million) by the European Commission for taking part in cartels in the financial sector.

The Commission handed JPMorgan a 61.7-million-euro fine for rigging the Swiss franc Libor benchmark interest rate between March 2008 and July 2009. It was also fined 10.5 million euros for participating in a cartel on Swiss franc interest rate derivatives.

UBS' penalty in the derivatives cartel came to 12.7 million euros and that of Credit Suisse was 9.2 million euros. Royal Bank of Scotland alerted the Commission about both cartels and escaped total fines of 115 million euros.

The penalties are the latest by the European Commission, which along with authorities around the world, has handed down billions of euros in fines against top banks for rate-rigging, breaking trade sanctions and other misbehavior."

Chuck again. What? And nobody goes to jail? Just fines, for these larger than life companies that goes out of their pockets like chump change? Oh well, you can read the whole story here if that's your bag, Austin Powers! http://www.reuters.com/article/2014/10/21/us-libor-banks-fine-eu-idUSKCN0IA18120141021

To recap. The dollar selling ending overnight, as the euro weakness was just too much for the currencies to overcome. The A$ and kiwi are attempting to rebound in the early morning trading, but are still down from yesterday's values. Chuck takes us to school for a lesson from Hy Minsky. The SNB is serious about defending the franc's cross with the euro, no matter how weak the euro gets. The Bank of Canada meets today, no changes are expected, and Chuck questions Gold weakness again.

Currencies today 10/22/14. American Style: A$ .8800, kiwi .7975, C$ .8910, euro 1.2705, sterling 1.6050, Swiss $1.0535, . European Style: rand 11.0150, krone 6.60, SEK 7.7560, forint 240.82, zloty 3.3225, koruna 21.7787, RUB 41.05, yen 106.95, sing 1.2695, HKD 7.7565, INR 61.27, China 6.1437, pesos 13.53, BRL 2.4855, Dollar Index 85.43, Oil $82.45, 10-year 2.19%, Silver $17.40, Platinum $1,272.75, Palladium $777.75, and Gold.. $1,248.11

That's it for today. Isn't Life Strange, by the Moody Blues from the Seventh Sojourn album is on the IPod right now. I know I've said this before, but that album is one of the albums that I would take to the Island with me. Have you ever played that game? What 10 albums would you take to the island with you? No live albums, no greatest hits. If you have a wide range of music tastes like I do, this gets pretty intense! Hey! New Zealand's Rugby Team, The All Blacks, are coming to the U.S! They will play the U.S. team in Chicago, Nov. 1. It's not every day that a world class team comes to the U.S.! My Cherie Amor by Stevie Wonder just started playing and I started singing along, out loud, and then realized that Mike was sitting here! I bet he was a little uncomfortable having the boss singing a love song! HA! Well, the College Football season has really begun to heat up, my beloved Mizzou Tigers are out of the running for the playoff, with 2 losses so far, but it will be interesting to see who the committee has chosen in the initial poll that gets released next week. The final four, if you will. Pretty neat stuff for College Football, and there's still 6 games to play! OK. I've really gone long here today. Time to go. I hope you have a Wonderful Wednesday!

Chuck Butler
EverBank World Markets

Posted 10-22-2014 2:08 PM by Chuck Butler
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