Who's Still OK With Deficit Spending Now?
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In This Issue.

* Currencies & metals allowed to hold gains.

* Canada pension board to buy A$'s.

* Taxes are going to the moon.

* Who said that?

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

Who's Still OK With Deficit Spending Now?

Good day. And a Tub Thumpin' Thursday to you! I'm a bit under the weather this morning, so this will probably be short-n-sweet, but then you never know with me, I could go off on a tangent and not come back for awhile! But I doubt it. as I'm not even feeling up to what I've written so far!

Well. I had to laugh yesterday, when the NY traders came in, and didn't sell the currencies right away. I said to myself, "self, maybe the "big boys" read the Pfennig and now Know that I've uncovered their "game", so they have to lay low for awhile"! HA! Whatever the case, the currencies held their gains most of the day, and even added on in some cases.

Overnight, it's been a roller coaster ride, with the euro being sold ahead of the French bond auction, and then recovering after the auction results, which were not bad results, as yields on their bonds fell. The same result in Spain this morning too. More baby steps of stabilization. However, Greece continues to weigh heavily on the euro, and all other currencies as far as that goes. The ECB remains on the sidelines, and I think they'll remain there for some time, waiting until the last minute. This is worrisome for the markets, and I think a statement by the ECB that they remain the lender of last resort, would go a long way here.

The other day I told you that German Chancellor Angela Merkel was going to China, not to bash the Chinese for their currency policy, but to gain China's confidence in the Eurozone. In Merkel's meeting today with Chinese Premier Wen Jiabao, Wen stated that "China is still researching the best way to participate in the European Financial Stability Facility (EFSF)." That's a good sign.

As I've said for over a year now. China knows the steps it needs to take to become a world leader, and push the renminbi to the front of the class for reserve currency status. And one of those steps is becoming the World's financier, like the U.S. did after WWII. China already performs this function here in the U.S. and have taken the back road into Europe, but I think they will increase their financing of Eurozone debt, as they wrest the title of World's financier away from the U.S.

Gaining a wide distribution of the renminbi is another step that China has begun, as I've reported here. This whole change for China isn't going to happen any time soon, but it will happen at some point in the future. I'm thinking 2020, but could be as soon as 2017.

OK. Yesterday, I told you how manufacturing reports in Germany, China and Australia were all stronger than expected. The U.S. version of this report, strengthened from December, but, was not as strong as forecast. But the U.S. version has a good grip on expansion at this point. The weak dollar helps. and I know you're going to say, but Chuck, the dollar has been stronger recently. Yes, it has. but it's still weak!

Moving on. I found this to be a case of the kettle calling the pot black. Japanese Finance Minister Jun Azumi, took a shot at the U.S. Fed, and their interest rate policy last night. First Azumi was warning the markets about the yen's strength, and how he was in a position to do something about it (intervene by selling yen). And then he said, "Speculative moves are increasing in the market and we can't overlook them. Against the backdrop of the Fed's plan to keep interest rates exceptionally low until 2014, short term speculative buying has increased, contributing to the yen's gain."

Speaking of the Fed. They sure have had a pile of junk thrown at them and will continue to have it thrown at them. You see, Gov't spending has been a HUGE part of economic growth, measured by GDP. Now, everyone would love to see the Gov't out of the deficit spending deadly cycle they've been on for some time now. And they will attempt to do so, starting next year. But. what becomes of the economy, if the piece that the Gov't spending was taking up, isn't taken over by something else? Ahhh grasshopper, you have become so smart! Yes, the economy circles the bowl.

There were a couple of reports done recently that outline the hit that the economy will take in 2013 and beyond as the Gov't withdraws their support of the economy. JPMorgan Chase's guy thinks that 1% of GDP will be lost in 2013, as $500 Billion in spending cuts come on board in January 2013. And then another $250 Billion gets taken out by allowing the Bush tax cuts to expire. Bank of America's guy, thinks the hit will be worse. He believes that the first hit will be $586 Billion at the end of this year. And then $100 Billion per year gets taken out, as required by the agreement when lawmakers couldn't agree on spending cuts.

So. I'm all about less Government and less Government deficit spending. And if we have to suffer through withdrawal pains then that's what we need to do. We have to break this addiction to Gov't deficit spending.

Let's talk about something else. The other day I told you that the Aussie dollar (A$) had climbed back above $1.06, and the next line of resistance wasn't until $1.0770, so it had "room to run". Well. the A$ has climbed above $107 now, so the "room to run" is growing smaller. But that's just a line of resistance, there's not a "hard stop". The A$ reached $1.10 and change last year, so, it does have that ability, eh? The one thing that concerns me, is how quickly this move higher has happened. Let's not get ahead of ourselves here, OK A$ traders?

I read this morning that The Canada Pension Plan Investment Board, which manages about $155 Billion, plans to increase its longer-dated investments in Australia to boost returns. The Pension board already has about $10 Billion allocated in Australia and the A$... Pretty interesting stuff here.

Speaking of Canada. Canadian manufacturing wasn't on par with the reports from Germany, China and the U.S. yesterday, as it slipped a bit in January. The stronger Canadian dollar / loonie can be blamed for that. I'm not concerned here, Canada has the "stuff" other countries want, and will continue to attract investment.

Gold is eking out another small gain this morning, after adding about $5 to its value yesterday, it's up $4 this morning. I would rather see these small moves that fly under the radar, than the wild swings we've seen in recent years.

OK. a little game today of "Who said This?". Here you go. I'll give you this quote, and you guess you said it. the answer is at the end. "Gold, unlike all other commodities, is a currency...and the major thrust in the demand for gold is not for jewelry. It's not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating. "

Then there was this. And remember yesterday when I told you that the CBO (Congressional Budget Office) had forecast that the U.S. will print a Trillion dollar Budget Deficit for the 4th consecutive years in 2012? I completely forgot to mention the most important thought on this forecast. The CBO has also forecast that the Budget Deficit in 2013, will narrow and in future years will continue to narrow. Well, just how did the CBO come to that conclusion? Ahhh, grasshopper, sit, here's how. First we have the reduction of Deficit spending that we talked about above. and then. the real reduction comes from. The CBO has calculated an increase in Gov't revenue for future years. You know what Gov't revenue is don't you? Taxes! In fact, the CBO believes that taxes will increase by 30% in the next two years!

Oh. and there are still people out there that think having debts are OK. well not when Taxes to the public have to rise 30% to help pay for them they are not! And that's just the tip of the iceberg folks. as each year comes from here on out, large numbers of baby boomers are going to hit the retirement age, and those unfunded liabilities I told you about last week? Well. I guess we'll solve that problem when we get there, eh?

To recap. The NY traders didn't reverse the currencies' overnight gains yesterday, and the currencies and metals were allowed to add to their gains all day! The gains were small, but still, gains. China is mulling over how to participate in the EFSF. It's easy. write a check! U.S. manufacturing was up nicely in January, and Canada's was down slightly. And the CBO's bomb they threw at us, is a doozy!

Currencies today 2/2/12. American Style: A$ 1.0710, kiwi .8320, C$ 1.00, euro 1.3140, sterling 1.5820, Swiss $1.0870, . European Style: rand 7.7210, krone 5.8360, SEK 6.7550, forint 223.60, zloty 3.2070, koruna 19.1760, RUB 30.31, yen 76.10, sing 1.2490, HKD 7.7555, INR 49.15, China 6.3020, pesos 12.90, BRL 1.7340, Dollar Index 79.16, Oil $97.10, 10-year 1.83%, Silver $33.58, and Gold. $1,745.00

That's it for today. Well. today is Groundhog Day! I don't pay attention to all that, but the movie with Bill Murray is pretty darn funny! And NO, it wasn't the Groundhog or Bill Murray that made that quote about Gold. it was. drum roll please. Alan Greenspan! Yes, he must be going back to his roots of a gold bug. OK. the Groundhog says we'll have 6 more weeks of winter. Hey, if the next 6 weeks of winter are anything like the last two weeks, no biggie! Well, that is for us here in St. Louis. well. I made it through the Pfennig. it was touch and go there at the start. Hopefully that's a good sign for the rest of the day! And as I'm getting ready to send this out the door, I see the currencies getting sold. I could go back and change all the prices, but I never do that, so why start now? And with that. I hope you have a Tub Thumpin' Thursday!

Chuck Butler


EverBank World Markets



Posted 02-02-2012 10:52 AM by Chuck Butler
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