In This Issue.

*  Dollar kicks butt and takes names later after GDP.
*  Eurozone flash inflation drops to .4%.
*  Canada to print May GDP.
*  Urbanization to happen in China!

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

Safe Haven Buying Fades.

Good Day! .  And a Tub Thumpin' Thursday to you! I'm not feeling too much like Tub Thumping right now, but maybe later, if that's OK? HA! Well, the Dollar Bugs were doing some Tub Thumping yesterday after the 2nd QTR GDP first reading printed.  Cardinals get taken to the woodshed by the Padres, and have you seen the video that's gone viral of the little girl that breaks down crying when told that her baby brother is going to grow up someday? I think back to my two older sisters, and how they babied me (until the rest of our siblings came along) and see them going through the same emotions.

Front and Center this morning, 2nd QTR GDP in the U.S. surprised most observers by printing at a 4% clip! This sent the dollar soaring, against the currencies and metals. It was NOT a case of traders looking under the hood as I was led to believe it would be, and the 4% print immediately brought about visions of sugar plums dancing in the heads of the rate hike campers. It got really ugly for a while, and then things seemed to calm down. This morning, the dollar is still in charge, but the moves are small at this point.

So, I missed the GDP number yesterday. Silly me, for I was using the fact that real capital expenditures (capex) has averaged only .8% annually, or hardly one-third of its prior historical rate, and the net investment in real plant and equipment after capital consumption allowances, has actually decline by 20% since 1999-2000, thus ruling out the true measure of future productivity growth, as reasons to believe that GDP would be disappointing.   As my friend Bill Bonner said the other day: “Capital Investment is what lies behind productivity and prosperity. Without it, the economy staggers.”  

I guess I wasn't the only person to miss on the GDP number yesterday. But I might be the only one that you read, so therefore you think I'm a dummy!  And rightly so! But I come by my dumbness honestly. I use logic. So, logically looking at 2nd QTR GDP, could you really get 4% growth out of an economy that saw Retail Sales drudge along. manufacturing slip.  household income decline. Durable Goods remain nascent. and as I state above capex is still non-existent? I didn't think so, but apparently the Gov't can.

And I have more thoughts on the GDP print, so I won't beat around the bush here. Well, I guess I was wrong. Recall Yesterday, I told you that I was told that the 2nd QTR GDP report would be a report that traders looked into and didn't have that knee-jerk reaction to the headline number.  They would be looking for Consumer Spending.  Well, that didn't happen.  The 2nd QTR GDP first reading printed at +4%, and there was no “looking inside the report”.  Now, before I go on here, let me also remind you that the very first reading of 1st QTR GDP was positive, and we all know where that ended up!  So, don't take this neon flashing light of a print to heart, for it will change, I'm sure of that, and probably not to the better!

So, with no looking inside, the dollar took some mighty swings at the currencies right out of the starting gate on Wednesday, but as the day went along, things seemed to calm down.  but still negative on the day.  One of the things HAD the markets looked into the components of GDP they would have found is that the difference between 2.8% -3.0% that I was looking for, and the 4% that printed was stronger inventory accumulation, which I learned back in economics classes should be viewed as transitory, and therefore this report should NOT be viewed as a signal that the economy is out of the woods just yet.

But just because that's how things should be viewed, doesn't mean the markets' traders will see it that way, and if yesterday and the overnight markets are any clue to how they see it, they certainly don't see it Chuck's way. (or the “right way”, as I proclaim it to be!)

In other news yesterday, the Fed's FOMC meeting was a non-event, with $10 Billion of bond buying each month slashed moving the total each month to $25 Billion. small potatoes given the size we began with, and the total that has been bought since March 2009, when the first tranche of bond buying (QE) was implemented. The Fed's balance sheet is now over $4 Trillion, folks. nothing for them to be proud of, and something that given all that I've learned about economics through the years, holds true, will end up in tears.  But. I'm beginning to question all that I've learned. I know, I shouldn't question my education in economics, especially the stuff I've picked up from the Austrian school of economics, but what IF none of this ends up mattering at all?  Geez Louise, I'll do the old two-handed economist thing. on one hand I'll be glad that the economy doesn't crumble and the dollar doesn't lose its reserve status, and on the other hand, I'll have to go back to the drawing board, and learn about why this happened like it did!

The Big Boss, and my good friend, Frank Trotter, and Chuck were discussing this idea that we'll be proven wrong in the end. I guess if I'm going to down on the good ship lollipop, it will be good to take Frank along with me! HA!

So. Today. the Eurozone flash inflation reports show that inflation slipped lower to .4% VS the consensus thought of .5%… Do you remember when I used to sing the song about Turning Japanese, yes, I really think so, about the U.S.?  Well, look who's about to push the U.S. out of the way, and take over the pole position as the country / union that's most like Japan?  Again, I'm going to go out on a limb, no worries, I'll pick a big fat one to hold me, and say that deflation is not a bad thing! I have no idea why the Fed and the European Central Bank (ECB) have monster problems with it!

The euro fell below the 1.34 figure yesterday, and remains there this morning, as the weaker flash inflation report has the calls for more stimulation by the ECB being yelled from the rooftops this morning.

Speaking of Japan. The Japanese yen has begun to spiral downward again. As the “safe haven” buying has faded. Which is something that I just don't get folks. Well, one thing is that I don't get that yen is still considered a “safe haven” currency. But two. I just don't get the safe haven buying fading. That's also seen in Gold, and Treasuries. Let's see. We have a commercial airliner shot down, we have the conflict between Ukraine and Russia heating up, not cooling down, we have the fighting in the Middle East ramping up and not slowing down, and we have China continuing to extend its tentacles across the South Seas, not giving two hoots about who they tick off, and the safe haven buying is fading? Give me a Break!

Canada will print their May GDP report this morning,  I'm expected better things from the Canadian economy, and hopefully it will start with today's GDP print! The Canadian dollar / loonie has slipped below 92-cents and doesn't really look like it wants to rally, but a stronger than expected GDP print could reverse the loonie's path right now.

And as I said earlier this week, about the markets counting their eggs before they're hatched, the dollar bugs are treating the dollar VS the high yielders of Aussie, New Zealand, Brazil, Russia, and S. Africa, as if the U.S. Fed has already aggressively hiked rates, and those countries did not!  The rate hikes haven't come, and if you listen to Janet Yellen you should get the feeling that she's singing the blues about labor, (which she should, for the numbers that have printed are a sham). and interest rates here in the U.S. aren't going anywhere right now.  And I guess that's why they call it the blues. 

The U.S. Data Cupboard got a workout yesterday, with the ADP Employment Change report for July showing that 218,000 jobs were added in the month. Personal Consumption printed greater than the expectation of 1.9% printing instead at 2.5%, and then the FOMC meeting. Today's Data Cupboard is confined to printing minor reports. Which is good for it allows everyone to get all geared up for tomorrow's Jobs Jamboree!  

Right now, the experts have the forecast at 231,000 jobs created in July.  Well, let's see, there is an election coming this fall that will decide whether the President has the backing of Congress for the remainder of his term, nor not. So, given that info. what do you think we'll be seeing in the form of Jobs reports from here until the end of the year?  Not that I'm accusing the Gov't of anything, it'll all be a co-in-qui-dink. I'm just saying.

So, as I told you above, Gold was treated as persona non gratis again by investors yesterday. I like to think about these downward moves in the face of all the geopolitical stuff I just talked about above, and think, “that's OK, they are allowing me to buy a cheaper prices all the time”. But that gets old, quickly in my eye. I've got something for you on another metal, Platinum in the next section, so make sure you don't miss that!

Before I head to the Big Finish today, I have to point out something that I heard last week in Vancouver, and have now applied it to something I read yesterday.  First things first. last week, Chris came out from one of the presentations raving about the presenter, who in this case was Robert Friedland, President of Ivanhoe Mining. He talked about urbanization, where people not currently living in cities will be moving into the cities, and with all this urbanization going on in the world, mainly in China and India, the pollution levels will rise, thus putting more pressure on carmakers to come up with more efficient catalytic converters.  And that's why he was now buying Platinum.

OK, that was all fine and dandy, but then a report came across my desk that talked about China's plans to add 100 million new city residents by 2020, which is about 2% annual growth in urban population.  So, there it was, proof of Friedland's urbanization!  The report went on to talk about how China will adopt differentiated approaches to push forward what's being called “hokou” reform. 

Another thing came to mind while writing this and it's different conversations I've had with people over the years that kept sending me emails telling me that I was wrong about China, for what were the Chinese going to do with the ghost cities they've built?  I would respond by saying, China has a Huge population of people and the Gov't only needs to make the buildings available to everyone, and there goes the empty house problem!  And now this new reform is going to do just that! WOW!   I Love It When A Plan Comes Together!  But in the end think of this all as good for Platinum and to a lesser degree Palladium!

For What It's Worth. Geez Louise! About 3 weeks ago, I did an interview (first one in a month of Sundays I must say) with Ducascopy TV out of Switzerland. They asked me my thoughts on if the peg to the dollar in Hong Kong was in trouble. I explained that I didn't think so, as the Hong Kong Gov't had an agreement that was to last 5 more years on the peg, and in addition, they also had sufficient policy freedom and financial resources to defend the peg. That was my story and I was sticking to it!

But then yesterday, my good friend, and fellow newsletter writer, Dennis Miller, sent me a couple of links to stories on how the peg to the dollar in Hong Kong is in trouble. The link is to a story on zerohedge.com where the writer thinks that a $715 Million purchase of dollars to defend the peg by the Hong Kong Monetary Authority (HKMA), which acts as Hong Kong's Central Bank.

Chuck again. Well, you all know me, I have Conspiracy blood flowing through me, but even this one needs more to it for me to think that the honker peg to the dollar is about to end. But let me remind you long time readers, and enlighten the new readers that long ago, I told you how I saw the Chinese dealing with the honker.  I still believe that the peg is going to be dissolved before 5 years is up. I've long maintained that China would like to see the peg dropped in the honker, so they can see how the currency reacts to floating, and how a Central Bank works with a floating currency.  After a successful run with a floating honker, China could then allow the renminbi to float, and then within a couple of years, they would fold the honker into the renminbi, and there would be just one currency for China & Hong Kong.

I don't believe that China will be ready for prime time in allowing their currency to float until their capital account opens up even more than it is now. China has gone a long way toward opening their capital account, but still have a ways to go to reach an openness that will allow for them to float the renminbi.

To recap. 2nd QTR GDP printed stronger than most expectations at 4%, and the rate hike campers in the U.S. began to buy dollars thinking that this is going to get the Fed to move quicker toward rate hikes. The currencies and metals all got whacked yesterday after the GDP report. Chuck points out a problem in the report, but don't let that get in the way of a “Happy Story for the U.S. economy”. Eurozone flash inflation drops to .4% from .5%, yes, they're turning Japanese, I really think so! The high yielders got whacked on the U.S. rate hike thoughts, and Canada will print their May GDP report today, Chuck is looking for a better report. And the safe haven buying is fading. I guess there are no problems in the world going on right now, so that makes sense, right? NOT!

Currencies today 7/31/14. American Style: A$ .9295, kiwi .8495, C$ .9165, euro 1.3385, sterling 1.6885, Swiss $1.1000, . European Style: rand 10.6940, krone 6.2780, SEK 6.8890, forint 232.85, zloty 3.1085, koruna 20.5835, RUB 35.54, yen 102.85, sing 1.2475, HKD 7.7500, INR 60.52, China 6.1675, pesos 13.19, BRL 2.2450, Dollar Index 81.47, Oil $99.33, 10-year 2.54%, Silver $20.68, Platinum $1,478.25, Palladium $880.95, and Gold. $1,295.20

That's it for today. Man, my fat fingers were flying around the keyboard this morning. So, if the letter is too long for your taste, no worries, it won't be like that every day! Can you believe that today is the last day of July? It seems like just a week or so ago, I was singing Uriah Heep's song July morning to start the month! WOW! Tomorrow we begin the dog days of August. The weather temperatures here in St. Louis, sure aren't the normal ones we experience in the dog days of August. A strange year for sure. Spring took forever to get here, and the Hot weather of Summer has never taken hold for more than a couple of days. Strange days indeed. I'm so disappointed with my beloved Cardinals. They've only scored 3 runs in the last 3 games, and they go out and trade a coveted minor league hitter for a troubled pitcher. What, What?  That's crazy folks! There's a day game today in San Diego, so at least I'll be able to watch some of the game. But if it starts out looking like last night when they lost 12-1 (how embarrassing!) I won't worry about it! Well, it's about time for me get off this buss today, and get this out the door! I hope you have a Tub Thumpin' Thursday!

Chuck Butler
President
EverBank World Markets