Good day. The currency markets continued to be held hostage by events (or rather non-events) in Washington D.C. The President and Congress came back to the Capitol and will begin work on a compromise to try and avoid the automatic spending cuts and tax increases which are now just 4 days away. Investors seem to finally be coming to the realization that a 'no deal' is actually a possibility, as equity markets across the globe have been ticking lower.
I was in contact with Chuck yesterday regarding some policy issues on the desk, and during one of these email exchanges he pointed to a headline which he had just seen come across his screen. The US Treasury department announced yesterday that the US would reach the debt limit on December 31. The letter, from Treasury Secretary Tim Geithner to Congressional leaders, said the Treasury would begin employing 'extraordinary measures' to finance $200 billion in deficits. The letter closed by saying that under 'normal circumstances' this money would last the government about two months, but it then goes on to say that 'given the significant uncertainty' that exists, it is impossible to predict how long these measures will last.
So we will hit the debt ceiling, but the Treasury has already found a way to vault the ceiling a bit. I'm sure the timing of this letter was designed to calm the markets and let them know that the country would not 'shut down' on December 31. Secretary Geithner had found an extra $200 billion of extra room, just like one of us finding an extra $20 in the pocket of that coat you just pulled out of the closet. But Congress and the President will still need to get something worked out, as the spending cuts and tax increases will still begin on January 1st.
The currency markets were mostly unchanged yesterday in very light trading volumes. The euro was one of the biggest movers vs. the US$, climbing up to an eight month high vs. the US$. French consumer confidence unexpectedly improved this month, propelling the euro higher. The improvement in an index of French household sentiment was the first monthly increase since May. A separate report showed the Italians are also gaining confidence in the area's recovery, as Italian business confidence data also showed improvement.
The pound sterling has been recovering from a pre Christmas drop and climbed back above $1.62 for a short time overnight. A report released today showed UK home prices rose last month to the highest level since the beginning of 2012. The data showed the number of loans banks approved for house purchases rose to 33,634 last month from 33,128 in October. The recovery of the housing market shows that the UK economy may finally be on an upward trend. The pound has gained just under 2% vs. the euro in 2012, as investors looked to diversify away from the sovereign debt crisis.
The Japanese yen continued to fall vs. the US$ as newly elected Prime Minister Abe was approved by the Japanese parliament. Abe is pushing for a target inflation rate of 2%, double the current target of the BOJ. And even that target is elusive, as a report tomorrow is predicted to show Japan's consumer prices fell .1% in November from a year earlier. The markets think Abe will be successful in getting the BOJ to take even more 'extraordinary measures' to get inflation back into their economy.
One of the ways he will be looking to increase inflation is by doing what the US has been doing: print and issue as much currency as the markets will bear. These 'bold monetary easing' measures will drive the value of the yen lower which should actually help the export driven economy of Japan. We could be entering a new era of 'currency wars' with both Japan and the US looking to devalue their currencies (albeit the US may not be devaluing our currency on purpose).
One of the 'big names' in the currency business is John Taylor, founder and chairman of currency hedge fund FX Concepts LLC. Taylor, during a phone interview with Bloomberg yesterday, predicted the yen would fall to 90 yen / dollar before reversing course sometime in 2013. "There is no reason for the yen to be strong now," Taylor told the Bloomberg reporter. "The yen could go to 90 vs. the dollar into early February before reversing course." According to the Bloomberg story written by Liz McCormick, Taylor is predicting the dollar will slide during the first part of 2013, but will shift as the year continues. "All our cycles and models tell us something is going to happen in February that will turn the markets around," said Taylor. "The year will start off with risk-on, stock markets up and then it's going to get into trouble later."
Investors in the Brazilian real would love to see more 'risk on' days during 2013. The Brazilian currency made a nice move higher yesterday as the Brazilian central bank intervened in the markets. The real appreciated to a six week high yesterday morning as the central bank sold $1.8 billion of currency swaps and agreed to lend as much as $2 billion in foreign exchange credit lines. Both moves were designed to boost the value of the real, and they seemed to be successful as the real jumped nearly 1.5% vs. the US$. The Brazilian currency has lost 8.82% vs. the US$ during 2012, and the only major currency which has performed worse than the Real in 2012 is the Japanese yen which is down 10.41% vs. the dollar. On the brighter side for investors holding the Brazilian real, the currency typically follows a big down year with a big up year (-34.73% '02 followed by +22.43% in '03, -23.09% '08 followed by +32.67% in '09). The currency has been down a total of 20.59% since the end of 2010, so perhaps a big move higher could be in store for 2013? One thing is for certain, the Brazilian real is one of the most volatile currencies we deal with.
Gold stabilized yesterday, and if finally looks as if the big fall in prices which has been occurring over the past 30 days may be ending. The Australian dollar moved lower overnight and is just one of 3 currencies headed for monthly drop vs. the US$(-.69%). The other two currencies which look to close out December with a drop are the Japanese yen (-4.33%) and the New Zealand dollar (-.15%).
And then there was this. The big boss, Frank Trotter sent me the following to share with Pfennig readers today: "Back in graduate school we had a case about a major newspaper, if I recall the Washington Post. In the 1960's the paper was on top of the world and in the process was easy to share this wealth through union negotiations with workers. Come the 1970's (one can only imagine if it was today) newspaper revenue was way down and the paper was balanced on the edge. A new negotiation was required and the paper was able to reduce it's obligations and flourish. Lax negotiations in the good times had nearly ruined the company but all concerned worked together to solve the problem with considerable economic pain and suffering on both sides. POR.
Roll forward over thirty years and on the way in I listened to a piece on the radio about Contra Costa County, California and the pensions of the fire department there. The plan is protected from alteration by state law and many former fire fighters have annual payouts greater than $100,000. The department will now have to close four stations to make budget after a new tax initiative failed. The Social Security Administration says that a 65 year old male has a life expectancy of 17 years - making this roughly the equivalent of a $1.2 million nest egg for retirement quite likely entering them into the fabled "1%". There was apparently no effort made to change the pension plan in the process. This story is repeated across the US creating an enormous retirement liability that simply will not be funded.
Sometimes I think we are all becoming Greek. We have seen the unrest in the streets in Greece every time a new austerity measure is passed; there is a simple refusal to consider raising the retirement age there or cutting back the payouts. Over the past ten years now, highlighted by the current lack of a fiscal policy debate from any large party here in the US, we have ignored the obvious - the benefits we are collectively set to receive exceed any reasonable ability to pay by a large measure without Chinese level economic growth.
Some say that there is no problem as long as interest rates on US Treasuries remain low - they say the invisible hand of the market speaks louder than theory. While I agree with the invisible hand, in this case the results have been rigged as the Federal Reserve and some of our foreign trading partners purchased over 80% of the debt issued in FY2012. Play against a house that is fixing the game is hardly an indication of market price discovery, and if it occurred in the private sector would likely result in long terms of incarceration. Also remember that until the world woke up after Lehman Brothers that Greece enjoyed borrowing costs nearly at the same level as Germany before skyrocketing as investors actually began to read their reports.
As a heavily jaded and cynical political observer and fan of no party it seems sometimes like a cheap and un-constructive comment that the only thing I expect out of the political process is nothing. There is scant good news in the world of US federal deficits, that even with about a $500 billion dollar reduction between the last Bush era budget of FY2009 and the projected FY2013 budget we stand near a trillion dollars short. But as I read the entrails laid out on the table before me here at delphi I only see a façade of changes either at year end or soon thereafter, with an explicit call from many to continue to try and "fix things" through stimulation. In the distant mists I see more dollar depreciation as time goes by, even as other countries and blocks attempt to win by competitive devaluations."
Chris again. I really enjoy Frank's writing; I always end up thinking 'I should have wrote that' after reading his contributions. Thanks again to Frank for sharing this Pfennig Pfodder with all of us.
To recap. Congress and the President resume negotiations regarding the budget impasse today, and the Treasury secretary sent notice to congress that we will hit the debt ceiling on December 31. Currency markets were mostly flat, but the euro managed to move higher on improved confidence data. The Japanese yen continued to fall, and Currency Hedge Fund investor John Taylor predicts it will hit 90 before turning around. The Brazilian real jumped higher yesterday on the back of intervention. And I closed out today's Pfennig with an excellent piece by the big boss Frank Trotter.
Currencies today 12/27/12. American Style: A$ $1.0381, kiwi .8200, C$ $1.008, euro 1.3276, sterling 1.6171, Swiss $1.0989. European Style: rand 8.5055, krone 5.5609, SEK 6.4975, forint 218.65, zloty 3.0625, koruna 18.9075, RUB 30.4559, JPY 85.79, SGD 1.2219, HKD 7.7518, INR 54.9375, China 6.2370, pesos 12.9075, BRL 2.0442, Dollar Index 79.381, Oil $90.98, 10-year 1.77%, Silver $29.8625, Gold $1,654.91, and Platinum $1538.25.
That's it for today. Another day down for my Pfennig writing, and I have heard that Chuck will be back in the saddle tomorrow. We missed out on the snow yesterday, the storm actually split and dropped some snow both north and south of St. Louis. My kids were upset, as they wanted to take advantage of their time off of school to get some late night sledding in. I hope all of you have a great Thursday, and thanks for reading the Pfennig!