July was an interesting month in the markets. The U.S. Federal Reserve pondered raising rates but balked, fallout from the Brexit vote filtered through the markets, and there was a near military coup in Turkey. Metals and currencies also had ups and downs, and Ben Bernanke made a visit to Japan. Let’s take a look at how global economies and commodity prices reacted to last month’s myriad of events.
Will the Fed Hike Rates in August?
The recent points of data here in the U.S. have been seen as “better” and certainly not of the ilk of previous months’ points where the results were viewed as soft, if not weak. But is this enough to change the Fed’s collective minds’ opinions, which were just changed the previous month to “no rate hike?” The back and forth with these rate hike opinions is like watching a tennis match, and not a classic McEnroe vs. Connors match either.
I tend to keep my thoughts on the idea that one data point does not make a trend. For instance, longtime readers know that I have no affection whatsoever for the BLS and their jobs report each month. But even if we play along with the BLS and their adjusted monthly jobs reports, we see that February’s jobs-created total was 233,000; March was 186,000; April was 123,000; and May was 11,000. Now that’s a trend! And June’s number of 284,000 is definitely an outlier in my opinion. First, 92,000 jobs were added by the BLS using their Birth / Death Model, which in my opinion is like adding ghost jobs each month, and for the quarter, the BLS added more jobs to the totals than were actually reported as created in the quarter. That’s right, I didn’t make a mistake there. The BLS added 549,000 jobs through their Birth / Death Model in Q2, while the total jobs they reported created was 421,000.
And do you want some more lunacy to this adjustment? As noted in The Daily Pfennig® blog on July 11, an independent research group called EIG recently issued a report saying that business failures have outpaced business startups by 70,000 per year since 2008. So, this reinforces my belief that the BLS's model does not accurately reflect the jobs the economy adds each month. And all the while the dollar rallies on these trumped up jobs reports. And as I said in my daily letter, the day after the 284,000 supposedly created jobs for June was announced, “...we can expect the rate hike rhetoric by the Fed members to return.” And that’s exactly what has happened.
So in the end, I doubt the Fed will hike rates in August, but I wouldn’t put it past them to do so given the fact that they have touted a stronger economy for the U.S. for a long time now. And what better way for them to say, “see we told you the economy would be stronger,” than to hike rates to confirm (in their minds only) that the economy is strong. I know that’s not really going all-in on a call, but given the track record of the Fed, I’m not about to bet the farm on any of their decisions!
A Near Miss of a Military Coup
July also brought us the news of an attempted coup by factions of the military in Turkey, which was thwarted by the Turkish government. Order was restored in a matter of a couple of days, but the Friday that the news began to circulate, the flight to safe havens was the cat’s meow of traders. It took a few days the following week to unwind all the safe haven buying, but it was finally unwound, and then we looked around and saw that the third week of July was leaving us with a bare data cupboard here in the U.S. Suddenly, traders realized that we were getting close to August, and August is a time, historically, that represents a basic shutting down of trading desks to go on holiday. I call them the dog days of summer for the currencies. And while July is not August, I get that, traders are already in that frame of mind, and the currencies are beginning to drift. And that could very well be the order of trading in August.
Big Ben Visits Japan
The Japanese yen was really the best performing currency for the first couple of weeks in July—before calmer heads prevailed and realized what was going on. The yen’s positive performance in the first two weeks of July was driven by so-called safe haven trading. But then along came a spider and sat down beside her (yen).
The spider being Big Ben Bernanke, who made a visit to Japan to talk to Japanese Prime Minister (PM) Abe, and Bank of Japan (BOJ) Governor Kuroda, about defeating the deflation that has held a grip on Japan for more than two decades now. This wasn’t the first time that the two Japanese leaders had listened to Big Ben. In 2003, Bernanke gave a speech to Japanese leaders regarding “deflation,” and Abe and Kuroda were in the audience.
So, what do you think Big Ben talked to them about with regards to defeating deflation? Well, we speculate that he spoke about “helicopter money,” but should probably go to Bernanke's blog to find the answer.
“While there were many challenges behind such a strategy, a ‘monetary financed fiscal program’ shouldn’t be ruled out in the case of an emergency in the U.S. Under certain extreme circumstances — sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies — such programs may be the best available alternative. It would be premature to rule them out.” – Ben Bernanke
And here’s where I have to refer to the comments that my favorite financial newsletter writer, Grant Williams, made in his letter titled, Things That Make You Go Hmmm…, regarding what Bernanke talked about: “...if you can get some other schmo to not rule them out for you so you get to find out whether your cunning masterplan actually does work, but at the same time avoid any blame at home when if it fails miserably, then as a true academic, that is a chance just too good to pass up.”
And just in time, the latest elections in Japan gave PM Abe an even wider margin of majority, thus greasing the tracks for more stimulus, and it sure does look like that stimulus may include “helicopter money” for Japan. What that will do to the value of the yen should not be good. The reason I say “should” instead of emphatically saying “will” is that fundamental analysis of currencies is currently not en vogue, and with all the geo-political problems in the world today, who knows what’s in store for the so-called safe havens? Without the so-called safe haven buying of yen this year, I would think, in my opinion, that yen would be trading around 125 to 130. And with another round of stimulus on the way, we could see yen at 150. But that’s wishful thinking for the leaders of Japan who would love a very weak yen to help introduce inflation into the Japanese economy.
So, Quick Quiz...
What’s the best performing currency year-to-date in 2016? Well, if you answered the Brazilian real you win a gold star. But if you wanted to be a “real currency” person, you would answer silver!
The currencies have had a pretty decent first half of 2016. The real leads the expanded list of major currencies with a near 20.98% gain and the Russian ruble comes in second with a 16.08% gain (all as of 7/19/16). However, there are just as many on the list of currencies that fall below the positive performance line as there are above the line. Those with negative performances so far this year include the Indian rupee, Swedish krona, Chinese renminbi, Mexican peso, and of course the British pound sterling. Pound sterling has lost more than 10% since the Brexit vote and is almost the worst performing currency this year, with only the Argentine peso doing worse.
I would like to take credit for pointing out a couple of months ago that we could look for a rally in the real, as historically, we have seen the host country’s respective currency rally leading up to, and during, the summer Olympics. But taking credit for it doesn’t even get me a slap on the back, so I’ll just say that it’s not all the doing of the Olympics that is causing the real to be the best performing currency so far this year. Much of it has to do with an improving economy and an optimism that hasn’t existed for a few years about the new / interim administration’s plans to open up the economy. They say that after three strikes you’re out, but in this case Brazil has three things going for it, and that is why the real is the best performing currency so far this year.
Silver Outperforms Them All
In the October 2014 Review & Focus® newsletter, I talked about how the demand for solar panels was going to increase—with the ability of 3-D printers now able to crank out solar panels at a quicker pace than was previously available—and how that would put even more pressure on the supply chain problems for silver. You see, silver is used in making solar panels, and the reports I keep reading tell me that there is a shortage of silver for physical demand. Remember, silver is an industrial-use metal in addition to an investment metal. For three years, gold and silver couldn’t find terra firma, or a bid in price to drive them higher, but that all changed in 2016. Year-to-date (7/19/16), silver is up 43.84% and gold is up 25.51%. Now, what could be driving that outperformance of silver to gold? Could it be the supply chain problems meeting the demands of physical silver purchasers? Could it be that silver, for seven of the ten years between 2001 and 2011 outperformed gold, so it’s no big deal? Or could it be that the long awaited end to the strong dollar trend is nearing? Well, I believe it is a combination of all three things, and when the wave comes that you’ve been waiting for, what do you do? You jump up, get on your surfboard and take action.
It remains to be seen if the five and a half-year strong dollar trend that we are currently in is really nearing an end, but for all intents and purposes it sure appears that way to me. I wrote a piece that gives you my complete thoughts on why I think the strong dollar trend is nearing an end, if not already ended. I strongly suggest you read it.