The Tariffs Begin To Show Up In The Data…

July 3, 2018

* Currencies hit a roadblock yesterday…

* It’s Our Independence Day Tomorrow!

Good Day… And a Tom Terrific Tuesday to you! Are you staying cool? Because it’s going to be a hot one here for the 4th of July Independence day Holiday. I’m going to put something in the Big Green Egg, and 6 hours later I’ll check it. No standing over a hot grill for me! But Barbeque will be in order for sure! I’d like to do some ribs, but, I don’t think everyone that will be here are fans of ribs, so I’ll have to think of something else… Kansas greets me this morning with their song: The Wall… In the 70’s you didn’t get much hotter for a band than Kansas was… I’m just saying…

Well, I was looking over some charts yesterday, of the stock market performances of the S&P 500, Dow and Russell 2000… And if you believe in charts, then go out and load up on more stocks… But if you only use charts as a “helper”, then be careful… Because in other charts I looked at, the effects of the Trump tariffs are already kicking in, as they might not be actually kicking in, but psychologically they’re kicking in, as companies worry about what it’s going to do their costs…

That was very evident in the ISM (manufacturing index) that printed yesterday for June. The ISM index rose to 60! WOW, now that’s impressive, especially given that Durables and Factory Orders were all negative in growth… But I digress… The thing that caught my eye in the ISM though were the “internals” of the report. You see, apparently the supply chain is under stress and factories are taking longer to deliver goods.

My friend, David Gonigam at the Five Minute Forecast had this yesterday… “The “supplier delivery” number is up to 68.2, and this is an instance where higher numbers aren’t necessarily better. Instead, we’re looking at the worst disruptions to the supply chain since the “oil shock” of the mid-1970s.

The cause? Steel and aluminum tariffs, say the report’s authors. “Respondents are overwhelmingly concerned about how tariff-related activity is [affecting] and will continue to affect their business,” says ISM’s Timothy Fiore.” – David Gonigam

I love it when I have a thought about something, and then out of the air, comes a link, a newsletter, etc. with confirmation of what I’m thinking!

There’s certainly a “split” if you will, of people in this country that think everything’s coming up roses, and then there’s people like me that think that the roses are 7-days picked! But that’s what makes the world go around, right? As long as we can have a civil discussion about it, I hear you, you hear me, and we go get a beer, right?

I keep talking about a credit crisis that’s going to hit the markets sooner or later… It could come from any number of credit sources… Auto loans, student loans, mortgage loans, corporate loans, etc. But I’m keeping my eye on the student loans… There’s more than $1.5 Trillion in Student Loans and the default rate has steadily climbed to 20%… And it’s still growing, folks…

A credit crisis begins in one sector and then spreads to the other sectors very quickly… So, we had better keep our eye on all of these credit sources… because they are all risky business, and I’m not talking about the Tom Cruise movie either! One of these days, all this stuff will come crashing down around us, you don’t keep adding to debt until it can’t take any more! And you have to stop digging a hole when you find out the hole doesn’t have any Gold!

Well, I should have figured that if I saw that China’s renminbi was being allowed to depreciate, to offset trade tariff effects, then the People’s Bank of China (PBOC) was ready to disavow any hint that this is what was going on… And the PBOC has begun to talk about how they will not allow the renminbi to be taken down excessively… Those sly Chinese bankers… They knew just how weak they could allow the renminbi to go before they would apply the brakes on any further thoughts of depreciation.

And that’s what they are doing right now… applying the brakes… The Chinese have come to the conclusion that the renminbi has fallen enough… Enough is enough, now we’ll have to see if the markets are going to play along…

When I first began trading currencies for the old Mark Twain Bank, I was taught that the markets had deeper pockets than any Central Bank… And that’s why I’ve always said that Central Bank intervention can move markets short term, but they won’t last, because the Central Bank can’t continue to spend money on a falling currency to defend it.

But I think China’s PBOC presents a different animal to the equation of whether Central Bank intervention works or not. The Chinese proved back in 2015, when the Capital Flight out of China was HUGE, and there were all those calls for a collapse of the Chinese economy… But, China simply used some of their $3 Trillion plus reserves and bought renminbi, to defend it, and soon, the markets were playing along with the PBOC…

I was excited to see that my Pfennig last week titled: Emerging Markets, the Canary In The Coal Mine, got a lot of notice… The Twitter-verse seemed to like it, and I didn’t get one email that day telling me I was wrong, as opposed to a normal day where people tell me I’m wrong all the time! HA!

I’ve gone this long into the letter without telling you what the currencies did yesterday… And that was on purpose, as the currencies and their attempt to recover got stopped at the border… I had a funny line (to me that is) ready, but decided it wouldn’t be funny to everyone… See how I’ve matured? HA!

During the day yesterday, the euro was giving back most of its gains from Friday, but by the time the day ended the single unit was back to the same level it was early yesterday morning 1.1642. Overnight, there was more movement, and the single unit has inched higher, but not by much. The Dollar Index is trading at 94.68 this morning, and yesterday morning it traded at 94.79…

The rot on the Emerging Markets currencies’ vines is beginning to really take hold, and getting exposed to the sunlight, which means it’s going to keep growing… The price of Oil has bumped to near $75 this morning, and the Russian ruble can’t find a bid, and the Brazilian real continue to fall like a rock from a ledge.

Come to think of it, the price of Oil’s rise isn’t helping another of the Petrol Currencies this morning, as the Canadian dollar/ loonie has dropped in price. The Norwegian krone, which follows two leaders, the price of Oil and the euro, is on the rally tracks this morning, due to both of its leaders bumping higher.

told you yesterday that on Friday this week, it’ll be the Jobs Jamboree for June… Right now the so-called experts are expecting 205,000 jobs created in June… That sure doesn’t say much for all those college grads that were looking for jobs, eh? Yesterday afternoon, I got to thinking about me not being around after today for the rest of the week, and thought, well, I guess I should at least give everyone a heads up as to what else could move markets as the week goes on…

OK, so starting today… automakers will report their June sales totals. Forecasters predict full-year sales falling short of the three previous years when sales have topped 17 million cars and trucks.

Also today, we’ll see Factory Orders for May… April’s negative showing here, will probably spill over to May, so another piece of real economic news in the negative…

The stock market will close today at 1pm ET, and be closed tomorrow along with banks and a whole shootin’ match of other things. We pick things up again on Thursday with the Fed’s last meeting Minutes… These could be a powder keg for the markets, so look out for those Meeting Minutes!

Then on Friday, we have the aforementioned Jobs Jamboree, and, more importantly, in my opinion, since the Jobs report is so heavily hedonically adjusted each month. The first round of Trump tariffs goes into effect on Friday when the U.S. will begin imposing a 25% tax on $34 billion worth of Chinese products… And the rot on the economy’s vine will begin to creep up the vine…

So, there you have it… a week’s worth of stuff that will go on once I sign off today… You know, that reminds me to remind you, that the last week of July, first week of August, is my annual summer vacation… I’ve been taking those weeks off for so long now, that I almost forget they are coming up! It’ll be a two week sabbatical for you from me, so you have that to look forward to!

Yes, it’s just me these days… At my old place of business, I had “back ups”, when I was unable to write, like vacations, scans days, infusion confusion days, etc. So, now there’s just a void… I’m sure my publishers, the wonderful Aden Sisters, will probably send you a letter or two during those two weeks… I have to say that I’m loving my association with the Aden Research folks, Mary Anne and Pamela…

Gold lost another $6 in yesterday’s trading… The shiny metal just can’t seem to catch a break or a bid these days. I’m still not going to back off my view that Gold is a store of wealth, is independent, has no obligations, or any dolt Central Bank doing dolt things like implementing negative deposit rates, etc. And since Gold hasn’t performed very well lately, a lot of people/ investors panic… But… if you want to diversify from the legitimate fear for your assets into tangible assets – Then an asset allocation to Gold I would think would be good especially in view of the unresolved debt crisis and the policy of the central banks – then Gold is an obvious choice of asset class… And that’s all I’m going to say about that! (today at least! HA!)’

And looky there! Gold is up $5 in the early morning trading on this Tom Terrific Tuesday! They used to have a saying on the trading desk at a brokerage firm I worked at in the late 70’s… just to get this out of the way, no bodies were harmed…. But the traders would say, “even a dead body bounces”… And when I saw Gold bounce this morning, my mind drifted back to the late 70’s… Sorry if I offended anyone with that old trader saying about assets that bounce… Man, that’s so long ago, my oldest child, Dawn, wasn’t even born yet! Wait, What? I had a life before children? I don’t believe that for one minute! HAHAHAHAHA!

To Recap… The currencies hit a roadblock yesterday, and their advances were stopped at the border, but have recovered in the overnight markets to sit about where they were yesterday morning. Gold lost $6 in trading yesterday, but is up $5 in the early morning trading today. Chuck brings you up to date with all the goings on for the rest of the week, and the Trump tariffs are already showing up in the economic data!

For What It’s Worth… I’ve been talking about the rot on the Emerging Markets for a few weeks now, and when I saw this synopsis of the goings on in these markets I had to get it in this letter so you could see it too…

• The DXY index, which tracks the US dollar against other major currencies, rose 5%.
• The Argentine peso and Brazilian real fell 30% and 14%, respectively.
• The Turkish lira and South African rand each fell nearly 14% versus the dollar.
• A bunch of Asian emerging market currencies fell 3% – 6%.
• Europe’s emerging markets weren’t spared. The Hungarian forint (-10.0%), Polish zloty (- 9%), and Czech koruna (-8%) led a long list of EU peripheral currency losers.
• China’s stock indexes fell by double-digit percentages in the quarter, though that might have more to do the incipient trade war than relative inflation and interest rates.
• Asian junk bond spreads (their yields versus those of high-grade bonds) widened dramatically.
• Emerging market bank stocks got crushed, including Banco do Brasil (-30%), Banco Bradesco (- 30%), and Brazil’s Ibovespa stock index, down 27% in U.S. dollars.
• Last but definitely not least scary, US and European bank stocks fell hard last week, which isn’t surprising since they’re on the hook for untold amounts of the aforementioned emerging market securities and currencies.

Chuck Again… I have to say that this all could certainly blow over, and everything will be right on the night… There! I said it, now this FWIW piece is fair and balanced! But do I believe that? Not for one Iota! Like I said earlier in the week… The Emerging Markets is the Canary in the Coal Mine…

Currencies today 7/3/18: American Style: A$ .7395, kiwi .6735, C$ .7583, euro 1.1650, sterling 1. 3188, Swiss $1.0062, European Style: rand 13.7228, krone 8.1275, SEK 8.8521, forint 281.60, zloty 3.7743, koruna 22.4025, RUB 63.21, yen 110.85, sing 1.3660, HKD 7.8445, INR 68.56, China 6.6542, peso 19.68, BRL 3.89, Dollar Index 94.68, Oil $74.82, 10-year 2.87%, Silver $15.94, Platinum $824,48, Palladium $947.47, and Gold… $1,247.26

That’s it for today… And for this week… I sure hope you can have a grand Independence Day tomorrow… I would suspect the markets, for the most part will be shut down for the rest of the week, as those that are able to make this a long holiday week, will do just that! My beloved Cardinals are making a trip out west, which means I won’t get to see much of the games because they are on so late! Last night, for instance I went to bed in the 5th inning! Maybe a trip out west is what they need to straighten themselves and their season out… time will tell… At least they got off on the right foot last night with a win in Arizona. I hear that there will be a large crowd of people here tomorrow, and I was asked what would I like to cook for them… Hmmm… I’ll have to think about that, since it’s going to be near 100 tomorrow! The late Great Leon Russell takes us to the finish line today with his song: Queen of the Roller Derby… So, get out there and shoot some fireworks, wear some red, white and blue, and fly a flag… And be careful! I hope you have a Tom Terrific Tuesday, and remember to Be Good To Yourself!

Chuck Butler


Nuria Pujol