This Is Just the Tip of the Deficit Spending Iceberg

A risk “kind of” on day… Which I believe will be difficult to hold on to as we draw closer to Thursday. The volume will dry up and there will be all kinds of position squaring ahead of Thursday; for many traders, including yours truly, will be making this a 4-day holiday weekend, and good traders do NOT leave themselves out on a line with open trades before leaving for four days!

The reason I say this is a “kind of” risk on day, is that while the currencies remain very near the levels they traded at yesterday, they just don’t seem to have the “oomph” behind them this morning, which means they could be subject to a sell off in a NY Minute… Or… When US data prints and throws us right back to risk off! One thing that happened in the European session this morning was the announcement that a German Bank, WestLB, is in dire need of a takeover… This has knocked the risk takers back a notch.

The data from Germany this morning was quite good, as the German Business Confidence report, as measured by the think tank, IFO, hit a 15-month high this month! The Index of Business Confidence rose from 92 in October to 93.9 this month… That’s quite impressive, don’t you think? And to think that’s all going on while the euro (EUR) remains quite strong versus the dollar and other currencies. But, in reality, what else did we expect to see, given the strong third quarter GDP in Germany that we saw last week!

There’s lots of talk that Germany’s growth is being propped up by stimulus. That probably has a lot to do with the economic growth in the Eurozone’s largest economy. So… Just like we talked about yesterday with Norway… Germany needs to balance the growth and the removal of the stimulus… And again, might I add, Germany and Norway were in fiscal positions to provide stimulus… The US was NOT!

Gold held to its new level of $1,170… Unbelievable! The way gold has moved this quickly through the $1,100 handle, one would think that $1,200 is not out of the realm of possibilities by year-end, eh?

I gave my final educational session to the folks at DTI yesterday, this time it was on the “additional tools” of diversification… I had talked about currencies and precious metals in previous sessions… Yesterday, I talked about Foreign Bonds, and Equities. They too are forms of diversification, and ones that you won’t find at every brokerage house. But you will find them at our brokerage house! The one that I started before EverBank even opened our virtual doors… EverTrade Direct Brokerage… You know how E-Trade brags on TV that they can do foreign stocks in 6 local markets? We’ll do them in over 20 local markets!

OK… Sorry, but I got going on those additional tools and the next thing I know, I’m typing an ad for our brokerage!

Speaking of bonds though… Get a load of this…

The Treasury sold $44 billion of two-year notes at a yield of 0.802%, the lowest on record, as demand for the safety of US government securities surges going into year-end.

Investors are piling into short-term Treasuries on concern that this year’s rally in risk assets has outpaced growth prospects and as Federal Reserve officials signaled that interest rates would remain near zero for an extended period. Rates on some Treasury bills turned negative last week for the first time since last December, when global credit markets froze.

So… Great! You have to pay the government for them to hold your money! What a great deal! Where do I sign up for some of that? NOT! How crazy does someone have to be to think that’s a great deal?

Anyway… The Treasury is scheduled to sell $42 billion of five-year securities today and $32 billion of debt maturing in seven years tomorrow, both record amounts. When does this all end? Well, I’ll tell you how it all ends… In tears! But this is just the tip of the deficit spending iceberg, folks… Just wait till we get all the “stuff” the government is promising! Did you see the article in The New York Times yesterday?

First of all, I don’t read the NYT, for a number of reasons, but… Yesterday, the paper ran an article that sounded like the writer had been reading the Pfennig for quite a few years, and really attacked the government’s deficit spending… But it also gave some very scary numbers for the average guy and girl to deal with. Like how in 2019 the you-know-what hits the fan when the interest payments on the debt that we’ve issued will be… Oh, never mind… Nobody cares about this stuff any more… Otherwise they would be banging on their representatives and Senators to just say “NO!” to more spending… So… Either people are doing that and their representatives don’t care… Or… There’s nothing going on.

OK… Enough! HEY! Canada printed a very strong retail sales figure yesterday! So, they’ve got that going for them! With gold gapping higher and higher, and oil remaining around $80, they both act as underpins to the loonie (CAD)… Even with the loonie owning a near zero interest rate!

In New Zealand, the inflation rate is ticking higher… One-year expectations are now in the 1.8 to 2.1% range… I know it’s been a long time since a lot of countries, including New Zealand had to worry about inflation ticking higher… But here it is… And, since it’s been so long, I might have to remind you that in New Zealand… The inflation target is 2%… So… The Reserve Bank of New Zealand (RBNZ) just might have to hike rates before they thought they would have to hike them.

In Norway… Norwegian third quarter GDP ticked up a bit at 0.9% versus the second quarter. This keeps the Norges Bank on schedule to hike rates again in the first quarter of 2010.

Here in the US yesterday, we saw Existing Home Sales soar by 10%! WOW! Unfortunately though, the key to selling these existing homes was the chopped down price of the home… Prices fell, as the median price for an existing home last month was $173,100 – down 7.1% from $186,400 in October 2008.

So… US stocks made a moon shot higher on the Home Sales growth data… They failed to look under the hood at the price drops, though.

Today in the US… The data cupboard is stocked to the brim! We’ll see the second printing of third quarter GDP, which, you might recall was originally printed at +3.5%… This second printing is expected to see the +3.5% figure get revised downward to +2.8%… That won’t be good for “recession is over” crowds… And would give a boost to the dollar, should the “trading theme” remain in place.

We’ll also see The S&P/CaseShiller Home Price Index for September… And consumer confidence prints this morning too! But the Big Kahuna today will be the FOMC meeting minutes from the November 4 meeting, where the Fed said that they would leave interest rates at near zero for some time to come… If there’s anything in the minutes that would counter that statement, it would be good for the dollar… If there’s anything in the minutes that supports that statement, it would be bad for the dollar… Or… At least that’s how I see it playing out!

I got a great note from a reader yesterday that said… “With all the emails you get wondering about the euro collapsing because of Italy, Spain, etc… Why don’t you just tell them, ‘If you think that’s the case, then the dollar will collapse because of CA, NY, IL all running huge deficits’? In addition to the national deficits?”

YES! Excellent point! And California is in the top ten economies of the world! You won’t find Italy, Spain or any of the other “problem” members of the Eurozone in that company!

And then there was this… My “then there was this” today will be a thought from good friend, David Galland on buying gold…

“Buy gold. Unless and until there is an angry upwelling of popular discontent at the growing size of government – and it has to be far more substantive than just a few vocal talk radio jocks, or even 100,000 or so people peacefully gathering on the Mall in Washington DC – the government will continue to grow, or even just keep running at current levels, which means the destruction of the dollar. Many tangible assets will do well, but their intrinsic value as money means gold (and silver) will do best.”

To recap… It’s not a “full on” risk on day, as there is a German Bank that is near failing that has thrown caution to the risk takers this morning. Gold hit $1,171 yesterday! Data from overseas is all pretty much saying that interest rate hikes will have to take place before too long, and the NYT writes an article about the deficit spending! I’m shocked! And I’m sure you are too!

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

Visit: EverBank

1 Comment on This Is Just the Tip of the Deficit Spending Iceberg

  1. Of course, you will not fine Italy or Spain in the company of California. Actually, Italy and Spain have economies that are larger than California´s. As to Italy and Spain been problems for the euro, sorry to say, I am not talking about Italy, but Spain has been the engine of growth in the eurozone for the last ten years, before the crisis, while Germany or France were flat. Actually, Spain still is the 8th or 9th largest world economy, the 6th largest world investor, the fourth largest investor in the US in 2007 or the second largest’s in the UK in 2008. Problem anyone?

Leave a Reply

Your email address will not be published.