A Pfennig For Your Thoughts

In This Issue…

  • German Investor Confidence plunges…
  • Current Account Deficit soars!
  • NFSP falls like a rock!
  • Election shenanigans are over…

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And Now… Today’s Pfennig!

Where Has All The Funding Gone?

Good day… Whew! What a long day yesterday… I was swamped and completely shot when I headed home last night… Things sure seemed to be going the currencies’ way yesterday after the awful showing of the Net Foreign Security Purchases, which I’ll get to a minute… But overnight, the latest German Investor Confidence report has knocked the stuffing out of the euro, as confidence plunged to the lowest level in 7 years…

Yes… German Investor Confidence finally showed what happens when interest rates go higher and we get closer to 2007, which is going to bring about higher taxes. The ECB has only raised rates 100 BPS since last December… Shoot Rudy, in the U.S. Investor Confidence would have been off the charts at that point in the rate hike cycle! But not Germany… They’ve taken these rate hikes hard… And I’ve got news for them… Rates are still going to go higher!

I’m going to stay on this subject a bit longer… If you read the Pfennig each day, or even once a week, you’ve probably seen where I talk about ECB ministers being out in force, drumming up higher interest rates… And that continues, which leads me to believe the ECB is simply telling us to be prepared for a rate hike in October. Now… The inflation data in the Eurozone has backed off lately due to weaker oil prices… But the ECB knows all too well that the oil prices can turn around on a dime. So… They’re going to keep the burner on to melt away inflation pressures and provide price stability…

Leading up to the rate hike in August, I had thought, and written that the ECB could very well move rates 50 BPS, instead of the 25 BPS hikes they had previously made. Well, I’m going to go out on the limb again and say that the ECB could very well go 50 BPS in October… I see this as a possibility because, as I said above, inflation pressures are slowing down, and I see the ECB wanting to get ahead of inflation… So… If the Fed is still playing guessing games with U.S. rates, and the ECB puts 50 BPS on the board… I don’t see how the dollar can avoid that trap!

Ok… Where have all the flowers gone? Where has all the funding for the U.S. Current Account Deficit gone? The Net Foreign Security Purchases (NFSP), which need to be around $70-75 billion each month to finance the deficit, only amounted to $32.9 billion in July… That’s right, less than 1/2 of the amount needed!

And how do I know what the amount needed to finance the deficit is? Well, Ollie, the 2nd QTR Current Account Deficit printed yesterday… And hold on to your shorts… The deficit widened to a new record of $ 218.4 billion! So… Simply divide that number by 3 (months in a quarter), and that equals $72.8 billion per month! And we only attracted $32.9 billion? Uh-Oh! I know, we really have to wait until next month to see the August number for NFPS to see if this underfunded position continues. But this can’t be good…

And the thing to think about here is the fact that there was a complete collapse in the purchasing of U.S. Debt issues (Treasuries and Corporate bonds), which leads us to look for equity purchases to make up the difference, right? Well, if you’ve all been paying attention, each month I’ve been telling you that Foreign Investors have shied away from equity investments… So, I don’t know if you can look for equities to make up the difference here….

I know I’ve been through this more times than you can shake a stick, but it is always worth going through once more! Historically, a country has to either raise rates significantly to attract foreign investment to finance their deficit, or they have to provide a discounted clearing mechanism for the purchases… That clearing mechanism is the dollar…

So, as I said at the top… The currencies rallied yesterday after seeing the color of the Current Account Deficit and the NFSP… And it was all going the right way, until that German Investor Confidence report put a damper on the currencies’ fun… Because, as we all know, the euro is the BIG DOG on the porch… All the other currencies are the little dogs, and they can’t leave the porch to chase after the dollar unless the BIG DOG goes first!

Today, we’ll see the Producer Price Index for August (PPI), Housing Starts and Building Permits… None of this data will be dollar friendly, but then again none of it is market moving. Tomorrow, we’ll be at a fork in the road… as the Fed’s FOMC meeting makes its latest rate announcement. As I said yesterday, I still believe the prudent thing for the Fed to do is to pause again, and allow the full effects of the 2 years worth of rate cuts to filter into the economy.

U.S. Treasury Sec. Paulson makes another visit to China today… I think U.S. taxpayers would prefer him to remain at home, given the Chinese not paying attention to whomever the U.S. sends there! I think Paulson should be humming the old Elton John song… Trying to find gold in a silver mine, it’s like trying to make whiskey from a bottle of wine…. Yes, that’s what it’s like trying to get the Chinese to allow more flexibility in the renminbi… Good Luck, Henry… I can hear the Chinese version of Don Pardo saying… “Thank you for playing… We’ve got a nice parting gift for you at the door!”

It looks like all the shenanigans with the Mexican election are just about put to bed, and that the Mexican peso would have a chance to recover a bit… But I’m still of the opinion that a “risk premium” needs to be paid to attract foreign investment to Mexico… And there’s no “risk premium” to be paid right now… Oh, the “risk premium” is a higher interest rate!

Currencies today: A$ .7540, kiwi .6620, C$ .8940, euro 1.2670, sterling 1.8825, Swiss .7970, ISK 70.15, rand 7.36, krone 6.53, SEK 7.24, forint 216.20, zloty 3.13, koruna 22.49, yen 117.40, baht 37.28, sing 1.5860, HKD 7.7850, INR 46.08, China 7.9357, pesos 10.92, dollar index 85.96, silver $10.99, and gold… $583.30

That’s it for today… Have you ever wondered why the Monday Night Game has to start so late? I can’t make it to half-time. I can’t imagine what it would be like on the East Coast! Memo to the league, you’re losing young viewers (and old in my case)… Start earlier! Have a great Tuesday!

Chuck Butler
EverBank World Markets