The President delivers the State of the Union, but now can congress???
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Have You Seen This?

In This Issue.

* President Obama delivers the State of the Union...

* US posts a surprise budget surplus...

* Did the G7 call out the yen or didn't they???

* Inflation expectations could drive gold higher...

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

The President delivers the State of the Union, but now can congress???

Good day. So did you all watch the President last night? I watched a majority of the State of the Union, and was actually a bit surprised on how much time President Obama spent talking about the very poor state of our economy. No matter what you think of his words, I think everyone would agree that our President is very good at delivering speeches (especially when compared to Rubio who seemed a bit nervous). Now if he and congress could just deliver on the REAL changes which are needed to set our country on a sustainable economic path. The biggest problem I had with the speech was the lack of a funding plan for all of the programs the President wants to enact. Listening to all of the proposals I couldn't help but think about Venezuela. But this isn't a political blog, and I have probably already said enough to generate a hefty amount of responses regarding the State of the Union address, so I will move on to the markets.

The dollar strengthened through most of the trading day, and continued to move higher in the holiday thinned markets of Asia. As I turn on the Bloomberg this morning I see the Europeans have reversed things just a bit but the dollar index is still holding just above 80.

One item which pushed the dollar higher yesterday afternoon was a surprise budget surplus posted here in the US for the month of January. Yes, the US government took in more revenue than they spent last month. Economists had predicted a deficit of $2 billion but instead the report showed a surplus of $2.88 billion. We had two spikes in the budget last year, running a budget surplus in both April (tax month) and September (US fiscal year end). But we haven't had a surplus in January since 2008, so the numbers were a big surprise for the markets. Chuck and I have been banging on congress and the administration to get the US fiscal situation in order, so I will have to give credit where credit is due - the increase in payroll and individual income taxes certainly helped the fiscal situation in January. And, according to the CBO the deficit will drop to 5.3% of GDP during the fiscal year ending September 2013, the lowest figure since 2008. And with growth expected to start to pick back up the CBO says the deficit will continue to fall to a low of 3.7% of GDP by 2015, but thereafter it will start to rise again.

But the more worrying number is the amount of debt the US is holding as a percentage of GDP. This number is predicted to continue to climb. According to the Economist magazine, publicly held debt as a share of GDP will climb to 87% in 2023 compared with 73% now. This growing debt is exactly why the deficit numbers are predicted to start growing again after 2015. Even with the proposed spending cuts, interest on this growing debt will eat into discretionary spending, and force the deficits as a percentage of GDP even higher. And the interest amount will grow exponentially with even a slight rise in interest rates. Just what do you think happens to this interest expense number when rates double or even triple as most believe they will over the next 10 years? That is what Chuck and I are so worried about!

Today we get a bit more data here in the US with the release of Retail Sales numbers for January. Economists are predicting a slight increase in sales for January, but the expected increases will be lower than the sales increases reported last month. Business inventories will also be released for the month of December when inventories are thought to have increased by .2%. Finally the import price index data will be reported and with the dollar trending lower in January I would expect import prices to be slightly higher MOM.

Yesterday I wrote about the currency statement which was released by the G7 to try and calm all of the talk regarding 'currency wars'. And the statement seemed to do just that, with the finance ministers agreeing to a 'truce' in the competition to devalue their currencies. But there was disagreement over whether or not the statement took aim at the Japanese for manipulating the value of the yen. Japanese officials were aggressively 'spinning' the statement saying it accepted further depreciation of the value of the yen in order to reverse deflation which has gripped their country. But an 'unidentified' G7 official came out yesterday afternoon saying the finance ministers of the G7 were concerned about the excessive moves of the Japanese yen. This was followed up with a statement by Bank of England Governor Mervyn King who said currencies should be allowed to fluctuate based on monetary-stimulus measures. All of this confusion over whether or not Japan should be allowed to continue to drive the value of the yen lower whipsawed the yen which ended the day near the weakest level since May of 2010. All of the rhetoric concerning the 'currency wars' will now shift to the G20 which will meet in Moscow February 15th - 16th. The Bank of Japan could add fuel to the 'currency war' fire with the release of their monetary-policy decision tomorrow following a two day meeting.

The outgoing BOE Governor King may have been trying to provide some cover to his own government as policy makers in the UK continue to add stimulus. The BOE released their quarterly inflation report today which stated their outlook for inflation was higher than it forecast in November. But BOE leader King still wants to keep the possibility of additional stimulus open, but also warned that there are limits to what policy measures can accomplish. The pound sterling came under additional selling pressure as investors continue to question the future success of the stimulus measures taken by the BOE. Right now it looks like inflation is starting to tick higher while the economy remains stuck in a slow/no growth mode; not a good situation.

This is the mess which will face the Mark Carney who will take over the helm of the BOE later this year. Carney joined the current BOE Governor in calling for pressure by the G20 to get countries from refraining targeting exchange rates and more specifically called out Japan's currency policy. Carney wants the G20 to expand on the G7 statement on currencies, perhaps clarifying their stance on Japan's recent devaluing of the yen. The Canadian dollar had a good day yesterday, rising from the weakest point this month vs. the US$ as the price of crude oil ticked higher.

According to a chart I noticed on Bloomberg, gold prices have been closely following inflation expectations through most of last year. This lends some credibility that the precious metals can serve as an excellent hedge against future inflation. The key is where investors believe inflation is headed, and not necessarily where price increases are being reported currently. Precious metals traders have been trading off of forward looking expectations, ignoring current price levels but instead focusing on where they believe prices are headed. That is why it is important to have some precious metals in your diversified portfolio well before reported inflation starts to move higher. The chart also shows that while inflation expectations have moved progressively higher since December, the price of gold has been mostly unchanged. Gold could possibly begin to play 'catch up' with these inflation expectations which would be a good thing for the price of the shiny metal.

Then There Was This. Did you get a chance to watch the video embedded in our Sunday Pfennig? In reviewing some of the email responses yesterday I noticed that many of you had trouble using the link included in the email. Unfortunately the link we included in last Sunday's Pfennig was incorrect. I would encourage readers to click on the following link to watch Chuck and Frank speak about what you can expect to hear at the upcoming Global Currency Expo: http://www.dailypfennig.com/2013/02/10/global-currency-expo-2013/ Again, I apologize for messing up the original link, I do hope you will all take advantage of this second chance to see Chuck and Frank in 'action'.

To recap. The President did a good job delivering the State of the Union, but how are we supposed to pay for all of these programs? The US posted a surprise budget surplus in January due to the higher payroll taxes, but the longer term budget numbers are still scary! The dollar moved higher on the good budget numbers but is still in a relatively tight trading range. The G7 statement which was supposed to calm the markets regarding the 'currency wars' actually caused more confusion as leaders disagreed on whether the Japanese can continue with their devaluations of the yen. And the price of gold has been lagging behind inflation expectations, which could be a good sign for future price moves in the precious metals.

Currencies today 2/13/13. American Style: A$ $1.033, kiwi .84078, C$ $.99646, euro 1.3514, sterling 1.5573, Swiss $1.0922. European Style: rand 8.8503, krone 5.4605, SEK 6.2766, forint 213.93, zloty 3.0875, koruna 18.7832, RUB 30.0082, yen 93.60, sing 1.2386, HKD 7.7563, INR 53.8187, China 6.2325, pesos 12.6776, BRL 1.9704, Dollar Index 79.886 (back under 80), Oil $97.92, 10-year 2.01 (back above 2), Silver $31.055, Gold $1,647.25, and Platinum $1,724.37.

That's it for today. We all will be blessed with the return of Chuck's wit and humor tomorrow as he takes back the helm of the Pfennig. I have certainly enjoyed sharing my thoughts with all of you over the past few days, but I will also enjoy getting just a bit more sleep! We are a bit short on the desk today, so I need to get this out the door and get to work. I hope everyone has a Wonderful Wednesday and thanks again for reading the Pfennig.

Chris Gaffney, CFA
SVP & Director of Sales
T. 314-951-1619
EverBank World Markets
8300 Eager Road, Ste. 700, St. Louis, MO. 63144 EverBank.com

Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837





Posted 02-13-2013 11:16 AM by Chuck Butler
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