Is all debt bad???
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In This Issue.

* A sticky question...

* Budget negotiations stall...

* BOJ to announce more stimulus...

* Gold and Silver reverse...

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

Is all debt bad???

Good day. I was met with the above question as I walked through the door last night. As I came home from work my 14 year old asked me the answer to the question 'Is all debt bad?'. My daughter, Lauren, is in the middle of exams and she was upset that she had missed this question on a civics exam. She occasionally reads the Pfennig, and has listened in on enough of our dinner conversations to realize that much of the world is currently in a debt crisis. So when she was presented with a true false question regarding debt, she answered True - all debt is bad.

From reading your comments about yesterday's Pfennig, many of you would have given Lauren extra credit, but unfortunately I had to let her know that her answer is technically wrong. As I explained to Lauren, not all debt is bad. There are times when a country, company, or individual needs to borrow money. Debt can be used to fund all sorts of very good projects, and keeps economies rolling through slowdowns. But debt is meant to eventually be paid off, not accumulated in a never ending cycle. So yes, Lauren missed that question on her civics exam; but in a way I am glad she missed it as I don't think it is a bad thing that my daughter is a bit scared of debt. I just wish some of our leaders in Washington would match my daughter's concern over debt accumulation. But enough of my dinner table economics lecture, let's get to the currency markets.

It was a 'risk off' day in the currency markets, but the moves were dampened by the holiday thinned trading desks. The yen finally reversed its recent sell off, and the dollar also climbed a bit as US lawmakers moved further apart on a budget deal. President Obama told business leaders that budget talks have regressed and accused Republicans of wasting a lot of time with political posturing (perhaps a bit of the pot calling the kettle black).

Today we have an absolute plethora of data which will be released here in the US. We start off the morning with GDP projections for the 3rd quarter which are expected to show the US economy grew just under 3% compared to previous estimates of 2.7% growth. It is Thursday, so we will also get the weekly jobs numbers which are projected to show another 360k workers filed for jobless claims last week. Continuing claims are predicted to have increased to 3200k in another indication the labor market will be very slow to recover. This employment data will be followed up with existing home sales and leading indicators. Yesterday's data showed a drop in Housing starts (down 3% MOM) but an increase in building permits (3.6%MOM). Definitely some conflicting data, so the existing home sales may help give investors a better picture of the housing recovery. Finally, the leading indicators are expected to show a decrease of .2% during November following an increase of the same amount in the previous month.

The yen had dropped for three straight days as investors worried the new Prime Minister would successfully push for more aggressive rounds of stimulus. The BOJ ends their two day meeting today, and are expected to announce additional stimulus moves. Adding to the worries regarding the yen was a Japanese government report released yesterday which showed the trade deficit widened in November. Traditionally Japan has run a trade surplus, and the deficits have caused investors to re evaluate their demand expectations for the yen. A country which runs a trade surplus creates demand for their currency, while trade deficits will typically drive the demand for (and value of) a currency lower. The yen has bounced back a bit this morning as some investors apparently believe the three day selloff was overdone.

The euro continued to climb through most of the morning yesterday, moving just above $1.33 for a short period. But the renewed worries out of Washington caused it to give back some of these gains and it is now holding in the $1.32 handle. I had a reader scold me for not writing more on the Swiss Franc and its recent rise. I haven't mentioned the Swiss franc simply because of its peg to the Euro. So as the euro moves, so will the Swiss franc. The 3.44% increase in the euro over the past month has been matched with a 3.36% increase in the Swiss franc vs. the US$. As long as the Swiss National Bank defends the peg to the euro, there is really no need to talk about the Swiss as it is tied to the euro. Now it will certainly be interesting if/when the peg is relaxed, and you can bet Chuck or I will inform all of you when we start hearing any indications of that. Until then, readers can simply watch the euro.

Several readers asked me to comment on the big drop in gold prices over the past couple of days. Many of you pointed me toward various manipulation theories, but I think there are two possible explanations for the recent drop in prices. First, there was improved confidence that a compromise would be reached between the two parties over the fiscal cliff. As we approached the year end, demand for gold climbed as investors looked for an asset they could hide in if/when our leaders in D.C. took us over the cliff. A second possible explanation is year-end selling due to the probable increase in tax rates. Silver has had a nice 12 percent rise this year, and gold is up 6.72% so investors could just be taking these gains off the table before 2013. By the way, this will be the 12th consecutive year of gains in the price of gold.

No matter what caused the selloff, both metals rebounded yesterday as concerns over the fiscal cliff agreement returned. Negotiations in Washington have deteriorated, so my first theory on what caused the recent sell-off has been flipped and gold is now climbing again. Most of the gold refineries are also going into a end of year / holiday shutdown, so additional supply will be limited over the next couple of weeks.

On a longer term basis, I am confident that demand for precious metals will be increasing. The fiscal problems facing many of the Western nations will shake global investor confidence in 'fiat' currencies. And my thoughts on the 'rise of the Chinese consumer' also support higher metals prices. As consumers in both China and India see even a slight increase in disposable income, a percentage of that income will likely be invested into the precious metals markets. Gold and Silver are much more accepted as forms of wealth storage in the Asian cultures, so any increase in disposable incomes should lead toward an increase in demand. Just another reason I think precious metals should be a part of every investors diversified portfolio.

And then there was this. The Fed's holding of interest rates at record low levels have had a very different impact on two separate classes of investors. A story I spotted on Bloomberg this morning pointed out the dramatic divergence between savers and professional investors. The story, written by Bob Ivry starts out with this line "Deepak Narula's mortgage-bond fund is up 39 percent this year. George Sanchez's monthly annuity payout is down 41 percent." Ivry goes on to explain some of the unintended consequences of the FOMC's interest rate policies. "The near-zero interest rate the Federal Reserve charges financial firms, as well as securities purchases that will balloon the central bank's balance sheet to almost $4 trillion next year, have made it easier for Narula's $1.6 billion fund to thrive and more difficult for Sanchez, a former college library director, to enjoy retirement."

The story includes an excellent quote by Nobel Prize-winning Columbia University economist Joseph E. Stiglitz: "Monetary policy has been indirectly, surreptitiously helping the top and hurting the bottom." Stiglitz blames the Fed policies for starving money-savers of income and boosting certain asset prices, widening the gap between the rich and the rest of the country. Bob Ivry has written some excellent pieces on the Fed, and I always enjoy reading his take on things.

To recap. Debt is not always bad, but the constant accumulation of debt is! Budget negotiations hit a snag, sending investors back toward safe havens. Today will be a big day for data here in the US markets, but holiday thinned trading desks should keep volatility down. The BOJ is expected to announce more stimulus, but the yen has already been adjusted for the expected increase in supply. Gold reversed its recent sell off, and started moving back up on worries on the budget negotiations. And the FOMC's zero rate policies have caused a divergence in returns for savers vs. professionals.

Currencies today 12/20/12. American Style: A$ $1.0493, kiwi .8343, C$ $1.0113, euro 1.3255, sterling 1.6262, Swiss $1.0974. European Style: rand 8.5159, krone 5.5498, SEK 6.5114, forint 216.0, zloty 3.0708, koruna 19.0335, RUB 30.6835, JPY 84.10, SGD 1.2184, HKD 7.7501, INR 54.8544, China 6.2306, pesos 12.7715, BRL 2.0619, Dollar Index 79.163, Oil $89.88, 10-year 1.78%, Silver $31.22, Gold $1,670.62, and Platinum $1591.24.

That's it for today. Congratulations to Antione Lawrence as his lovely wife Brooke gave birth to a beautiful baby girl yesterday. It is the couple's first child, and the first of three babies on their way for the WorldMarkets desk (Both Mikes, Harrell and Meyer, are also expecting). We anxiously awaited the news yesterday morning after Antione let us know he and Brooke were headed into the hospital. Both baby and mom are doing fine, and I'm sure proud papa Antione is beaming! Sounds like we could see our first snow of the year, it is currently raining but the temps are supposed to drop and the rain should turn to snow later today. I will wrap up today's Pfennig on that great news. I hope everyone has a great day, and thanks for reading the Pfennig!

Chris Gaffney, CFA

Vice President

EverBank World Markets

1-800-926-4922

1-314-647-3837





Posted 12-20-2012 11:33 AM by Chuck Butler
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