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In This Issue.

* BOJ leaves everything unchanged.

* China takes # 1 from Australia.

* It's all about U.S. 1st QTR GDP today.

* Monetary Base & Money Supply..

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


Good day. And a Happy Friday to one and all! It's finally Friday! A very long week for me, so, I for one am very happy to see Friday! I know my buddy Alex can't wait for the weekend to get here, as he looks more worn out to me every day! We end the week with rain storms moving into Missouri, so they should get here just in time to ruin our weekend, and dark clouds forming over the currencies and Gold, so let's get going before we get caught in the rain! HA!

Alrighty then! Since there's not a Whitman's Sampler of things to talk about this morning, I have a nice long piece on the Monetary Base and Money Supply here in the U.S. But first, what's happened and what's going on this morning, for that, let's turn to our ace street reporter, Charlie. Charlie, what do you see? Well, Chuck, yesterday, the currency and commodity rally that was so strong in the morning, dissipated as the day went along. Gold's $30 gain at one point was not held, and the euro's strong showing at 1.3070, didn't stand a chance against the dollar bugs. What are dollar bugs, I hear you asking? Well, they call Gold Bulls, Gold Bugs, so, I'm turning the table on the Dollar Bulls, and calling them Dollar Bugs.

The euro didn't lose the 1.30 handle like it had earlier in the week, but did lose almost 3/4's of a cent, and hasn't budged since late yesterday afternoon. You see, once the fog cleared on the markets yesterday morning, traders noticed that the U.S. will report 1st QTR GDP this morning. And 1st QTR GDP is expected to have accelerated from the previous quarter's .4% gain to a 3% gain. Quite a gain, eh? I can hear the proponents of higher taxes screaming that apparently the increase in the payroll tax didn't squash the economy, which shows the economy and consumers can handle more taxes.

Look. the 3% number as a whole will be nice. but it should be a short-lived increase, as I've been telling you the data in recent weeks has been pretty weak. In addition, shouldn't GDP be strong given the Gov't activity in the economy? I just think that a lot of people in the Gov't and the Paul Krugmans of the world will be pounding their collective chests over this report that if you ask me, and I know you didn't, but you're going to read it any way! I think the report's results are going to be very misleading. Because, of the Gov't activity, and the slowing we've seen in the 2nd QTR. But, I'm sure the realization of that, isn't going to enter into the markets' minds today, for it's all about instant gratification, and what have you done for me lately!

So.. that's what happened yesterday, and what's hanging over the markets this morning. In other news. China is now New Zealand's top export market, knocking Australia out of that position for the first time. EVER! Just another example of China's positioning around the world.

The Bank of Japan (BOJ) left everything alone last night, leaving rates and the amount of stimulus unchanged. I have to say that the BOJ has disappointed me on this one. Not that I think Central Bank intrusion in an economy is worth a hills of beans, but, the BOJ has said they were going all in on reinflating their economy, and last week G-20 gave them the green light to do so, and they left this meeting doing nothing. Yen rallied on the news that the BOJ left things unchanged.

And the Aussie dollar (A$) lost the $1.03 handle again, as traders and investors begin to look ahead at the May 7 Reserve Bank of Australia (RBA) meeting, that appears to be full of drama at this point, and probably even more as we draw closer to the date. I think, and I know this doesn't account for much in the markets, but I think that the markets have gone overboard with their pricing in of a rate cut. I went through the reasons I don't believe Australia needs a rate cut the other day, so no need to do that again, but if I'm right. all these trades to price in a rate cut will have to be reversed and the A$ could see a push higher. But again, we have over a week before we get there.

Gold is being spent by about $5 this morning. It's run up to a $30 gain yesterday, brought Gold very near 1/2 of its plunge. But then it appeared to be profit taking set in, and Gold finished the day up, but not as lofty as up $30 as it was earlier in the day.

The U.S. data cupboard, has the 1st QTR GDP which we've already talked about, along with the stupid Personal Consumption and U of Michigan Confidence reports today. All should be dollar positive. So watch for that.

OK. I promised you this, and it's long so stay with me on this. Well. I had to do a lot of soul searching earlier this week, after reading the letter from Van Hoisington that my friend John Mauldin posted and sent out. I had long believed that Money Supply had the "potential" of being inflated as the Monetary Base grew. Last week, I showed you a graph of the Monetary Base in the U.S. which showed the Monetary Base exploding higher and higher. But those beliefs were built on one word. "potential". and in the case of Money Supply following Monetary Base higher, the potential doesn't currently exist.

According to the Van Hoisington letter, "the Fed began its massive balance sheet expansion near the end of 2008. It was then that the Fed expanded the monetary base from $840 billion to $1.7 trillion in a matter of months. Further, from the initiation of this misguided program to the end of March 2013, the Fed has expanded the monetary base from $840 billion to $2.93 trillion. The money supply indeed went up (35%) but not in proportion to the increase in the monetary base (249%). Presently, the year- over- year expansion of M2 is only 6.8%, which is nearly identical to its year-over-year growth rate in March of 2008 before the Fed decided to "help out the economy."

So. from that data and info, you might figure out why inflation hasn't gone to the moon. Yes, as I've reported to you, it is much higher than what the BLS prints each month. But nothing like a lot of people thought it would be by now given the explosion of the Monetary Base, the near zero interest rates, and stimulus times 3.

The "potential" that's missing is this thing called the "money multiplier". So the funds go to the banks, and the banks do something with it, right? That's where the money multiplier comes into play. In talks with my friend, and Big Boss, Frank Trotter, we talked about how the money multiplier used to be around 10. But in today's world it's around 3. And therefore, the actual money supply isn't growing like the Monetary Base. So, the claims that the Fed is printing truck loads of money are incorrect.

But they are expanding the Monetary Base like there's no tomorrow! And The thing that I come back to though, is that this "potential" still exists. And should banks begin to put all that money to work in the economy, interest rates will rise very quickly. So, the "potential" for much stronger inflation is still there.

Now the Fed Heads believe that when that happens, they will quickly get inflation under control by selling some of their bonds, and reducing that Monetary Base. And interest rates will rise immediately. Who will be right? The inflation wins people, or the Fed wins people? I told Frank that I had long ago pinned my colors to the mast of inflation, and there was no way I could change horses in the middle of the stream now, even if I wanted to. And I don't want to!

But no one knows who will win. This is all unchartered waters for us. We can look to Japan, as they're a decade ahead of us, but the American consumer is completely different than the Japanese consumer, so our comparison only goes so far. So, you have to choose which mast you'll pin your colors to, now. and find out later how you did.

OK. that was Monetary Base and Money Supply 101. And for all you that already know all that, I apologize, but many people are unaware, and I had to clear up some misconceptions.

Then There Was This. I found this on the Bloomberg yesterday, and thought. "Hey! I just read that a guy said he thought this is what was going to happen next, and then voila! It's right here! Well, that "guy" was me. I said this yesterday morning, and then this printed later. interesting eh? Oh well, here's the story.

"Debate among Federal Reserve policy makers is shifting away from the timing of a reduction in bond buying to the need to extend record stimulus as inflation cools and 11.7 million Americans remain jobless.

At their meeting last month, several members of the Federal Open Market Committee advocated slowing purchases and stopping them by year-end. Since then, seven have voiced support for maintaining the current pace, including five who vote on the policy making panel: Governor Daniel Tarullo, New York Fed President William C. Dudley, James Bullard of St. Louis, Chicago's Charles Evans and Boston's Eric Rosengren.

"We heard a lot of discussion earlier in the year on the timing of tapering," Ward McCarthy, chief financial economist at Jefferies Group LLC. in New York and a former Richmond Fed economist, said in a Bloomberg Radio interview yesterday. "Some of the more recent developments -- the slowdown in the economy, the somewhat disquieting inflation data -- has taken that off the table for now."

Chuck again. tre' cool, eh? Well, not the gist of the story, but the story itself.

To recap. The Currencies and Commodities rally yesterday, didn't have the legs to run the whole day, and as the day went along, their lofty levels dissipated. It's all about the U.S. 1st QTR GDP print today that should show a 3% gain. Chuck gives us his thoughts on how he believes the report will be misleading. And China overtakes Australia as New Zealand's top exporter destination. Gold is being spent by $5 this morning..

Currencies today 4/26/13. American Style: A$ $1.0280, kiwi .8510, C$ .9805, euro 1.3010, sterling 1.5460, Swiss $1.06, . European Style: rand 9.13, krone 5.8665, SEK 6.5845, forint 231.80, zloty 3.1950, koruna 19.8180, RUB 31.32, yen 98.70, sing 1.2380, HKD 7.7635, INR 54.37, China 6.2208, pesos 12.17, BRL 2.001, Dollar Index 82.71, Oil $93.06, 10-year 1.69%, Silver $24, and Gold. $1,464.70. And it's Friday, so as always, here's the link to the U.S. Debt Clock, but make sure you put away the sharp objects before taking a peek! Click here:

That's it for today. Well, I finally remembered what it was I wanted to talk about yesterday! The NFL Draft! I wanted to say that the Rams would probably disappoint me, for what I see as their needs, they'll see something different. And guess what? They disappointed me with their first two picks! Oh well. I guess it's good that some things never change! Another water polo game last night brought another win, but that's going to get tougher, as their next two games, tonight and tomorrow morning, are against a top 5 rated team and the number 1 team in the state year in and year out.. Andrew told me I didn't have to get up early to come watch the game against the #1 team, but I told him wouldn't miss it! Stranger things have happened! No goals for Alex last night, but I thought he played well. And then I want to wish our Little Christine lots of good wishes as she will run in the Nashville marathon tomorrow. That's impressive, as I don't like to drive my car 26 miles, much less think about someone running 26 miles! And with that, I'll get out of your hair for today and this week. Thanks for reading the Pfennig, and I hope you have a Fantastico Friday!

Chuck Butler


EverBank World Markets



Posted 04-26-2013 11:45 AM by Chuck Butler
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