US dollar gets sold after Obama warns the nation about default.
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In This Issue.

* Dollar gets whacked by debt impasse...

* Aussie dollar rises ...

* KIWI hits a new high...

* India raises rates...

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

US dollar gets sold after Obama warns the nation about default.

Good day. No relief from the heat here in the Midwest, as the temperatures outside continue to hover near the triple digits. I thought we were going to get some relief yesterday, as they had predicted some rain, but I think it all evaporated it could reach the ground! President Obama was turning up the heat on congress last night with a speech to our nation regarding the approaching debt ceiling deadline.

Obama pointed out the US would experience a 'deep economic crisis' if leaders fail to reach a compromise and the nation defaults. He also asked citizens to contact their representatives to urge them to reach a compromise. Unfortunately I wasn't able to watch the entire speech, but read most of the highlights this morning and I have to say he did a good job of laying out the consequences if we ignore the debt ceiling and continue our 'borrow and spend' ways.

Wouldn't it have been great for some of our past presidents and congressmen to call a special news conference on our deficit spending? Instead they quietly approved the spending and figured the bills wouldn't come due until after they had left office, and that is exactly what has happened. Many of those who are now yelling the loudest about our spending also voted for all of the major drivers of the nation's debt during the past decade: wars in Afghanistan and Iraq, the '01 and '03 tax cuts, Medicare prescription drug benefits, and the TARP bailouts for banks and the auto makers. And we haven't even begun to see the financial impact of our new health care plan. Spending during the past two decades has truly gotten out of control, continually picking up speed like a runaway freight train. The financial crisis of the past three years has washed out all of the bridges just down the tracks, and now the politicians are all desperately trying to stop this train.

Unfortunately the politicians aren't going to be able to rely on rapid growth here in the US to solve the problem. Goldman Sachs Group is the latest among the major banks to cut their forecasts for third-quarter growth here in the US. Goldman, JP Morgan Chase, and BOA-Merrill Lynch have all lowered their projections recently and now agree the US will expand at a 2.5% pace compared to earlier projections of as much as 3.25%. With the jobless claims continuing to climb, and consumer sentiment dropping, I think the 2.5% is even a bit too rosy. But that has been the established pattern of late, with 'experts' setting up rosy projections of our economy and then being surprised when we don't hit the numbers. When your main objective is to keep stock prices on upward trajectory, predicting a bright future is needed. After all, stock prices are typically set by the expectation of future earnings, so analysts have to try and paint the most positive picture that they can. But the reality is not so bright, and the debt ceiling is finally bringing the discussion of the 'darker' side of our economic slowdown to the masses.

I guess this is the 'silver lining' of this debt ceiling debate, it has brought our dire financial position to the forefront of the media. Chuck and the rest of us at EverBank have been trying to warn people about our 'twin towers' of debt and deficits for years now. As you all know, Chuck spent the day traveling out to Vancouver for the 12th Annual Agora Financial Investment symposium. I have traveled with Chuck several times, and he never passes up an opportunity to educate those he meets about the state of our economy (teaching certainly runs in the Butler blood as both of Chuck's grown children are teachers). He sent me the following note after checking into his hotel late last night:

I talked to the cab driver. I talked to people in the hotel. and all of them believe that a day of "Armageddon" is coming for the U.S. and the dollar. These are people up here in the cool, fresh air, of Canada! I sent Chris some other notes I've assembled in the past week, on our debt picture. Last night, we had the President on, the Speaker of the House, and then I was waiting for the President to come back on and negate what the Speaker had said! This has gone so Theatrical. do dramatic. and bipartisan politics draped all over it. All I know is this.

Since 2001, I've told people that deficits mattered, and that it would weigh on us and the our currency some day. Well, that someday is right here, right now.

Chris again. With the debt and deficits of the US finally in the spotlight, the dollar got sold like funnel cakes at the state fair. But as I warned readers yesterday, this week could shape up to be pretty volatile, and the dollar could certainly snap back if/when an agreement on the debt ceiling is reached. But for now, the dollar is down and currencies across the board are higher, with the Swiss franc leading the way and even the so called risk currencies are rallying this morning. The South African rand is the top currency performer vs. the US$ in overnight trading, and the other 'commodity currencies' of Norway, New Zealand, and Australia are right behind it.

The rand was helped by the rising price of Gold which was able to hold above $1,600 in overnight trading. China has worked hard over the past several years to establish a foothold in the commodity rich nation of South Africa, and while the country is still seen as an emerging nation the currency has become a bit less volatile lately. The current debt impasse in the US would typically shift investors away from this 'risky' currency, as they seek the shelter of safe havens. But yesterday's markets don't seem to be worried about a global economic meltdown brought on by a US default and instead seem to believe in the ability of China to continue to push ahead with growth. A strong China will continue to keep commodities well bid, and the commodity currencies are the beneficiaries of this thinking.

The Australian dollar was on Chuck's mind last night also as he sent me this note:

Ok. enough of that. here's something that I think holders of Aussie dollars (A$'s) will love to hear. the markets are beginning to trade and hold A$'s like a "reserve currency". a currency that people will flock to in times of flights to safety! I had a Aussie reader send me a note saying that the A$ is becoming the "mining currency". and, that's not all.. as I shuffle across the stage with cane in one hand and my hat in the other! Seriously though. why not? I've always called the A$ the proxy for global growth. well. now it can be a flight to safety currency, a reserve currency, and the mining currency!

Chris again. Yes, the Aussie dollar continues to have a lot going for it. The RBA is expected to be raising rates sometime this year as inflation continues to tick higher. Australian producer prices increased .8% in the second quarter, matching expectations. Next week we will get the more important report on consumer prices in Australia. This inflation report is expected to show prices are rising, and should reverse recent sentiment that the RBA will be looking to cut rates instead of increase them. Reserve Bank of Australia Governor Glenn Stevens said in a speech last night that his nation's mining-led growth is turning around consumer sentiment. His positive outlook was another sign the RBA will have the confidence to raise interest rates in the coming months.

Not to be left out of the fun, the New Zealand dollar traded up to a record high vs. the US$ last night. The kiwi rose as high as 87.28 US cents which is the strongest this currency has traded since it was freely floated. There certainly doesn't seem to be anything holding these commodity currencies back right now. With investors worrying about the debt situations in both Europe and the US, countries with strong commodity based economies are certainly attractive. After all, would you rather own 'stock' in a country which has huge stockpiles of raw materials, or countries with huge stockpiles of debt? Currency investments are just like owning shares of that country, and investors certainly look like they are choosing the stock of countries with physical assets.

India's central bank raised its benchmark interest rate more than forecast to try and calm recent price increases. India's rupee rose to a 12 week high vs. the US$ after the central bank moved rates 50 basis points higher, doubling expectations. With the developed nations facing the threat of downgrade, emerging markets like India, Brazil, and South Africa are attracting more investors.

Then there was this. Chuck sent me the following 'Pfennig fodder' late last night. He typically sends me these types of things in order to get my thoughts flowing in the right direction. I thought they were a great way to end today's Pfennig:

Morgan Stanley reported in 2009 that there's "no historical precedent" for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Our total debt now exceeds GDP by roughly 400%.

Investment legend Marc Faber reports that once a country's payments on debt exceed 30% of tax revenue, the currency is "done for." On our current path, analyst Michael Murphy projects we'll hit that figure by October.

Peter Bernholz, the leading expert on hyperinflation, states unequivocally that "hyperinflation is caused by government budget deficits." This year's U.S. budget deficit will end up being $1.5 trillion, an amount never before seen in history.

Since the Federal Reserve's creation in 1913, the dollar has lost 95% of its purchasing power. Our government leaders clearly don't know how - or don't wish - to keep the currency strong.

To recap. President Obama tried to rally the nation behind increasing the debt ceiling while asking for a combination of spending cuts and tax increases. Goldman Sachs cut growth expectations in the US for the 3rd quarter. The dollar got sold vs. just about every currency as investors worried about a default. Chuck continues to talk about debt and deficits (THEY DO MATTER!!). Commodity based currencies rule, with the Aussie dollar and Kiwi hitting new highs. India raised interest rates, doubling expectations, and causing the rupee to move higher.

Currencies today 7/26/11. American Style: A$ $1.0942, kiwi .8728, C$ $1.0613, euro 1.4470, sterling 1.6396, Swiss $1.2473. European Style: rand 6.7027, krone 5.3608, SEK 6.2726, forint 185.33, zloty 2.7698, koruna 16.8495, RUB 27.58, yen 78.06, sing 1.203, HKD 7.7898, INR 44.1975, China 6.4419, pesos 11.6129, BRL 1.54, dollar index 73.661, Oil $99.66, 10-year 3.02%, Silver $40.42, and Gold $1,611.40

That's it for today. Sorry about the delay in getting the Pfennig out yesterday, but hopefully today's will reach you a bit earlier. As I said earlier, the heat continues here in the Midwest, and there doesn't seem to be any relief in sight. We officially started our next phase of testing on our new WorldMarkets system yesterday, so I was quite busy with testing well into the night. Dragging a bit this morning, but I am still going to try and make this a Terrific Tuesday! Wow, Lori just brought me a Latte, this is going to be a great day! Thanks for reading the Pfennig, and go out there and have a good day!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 07-26-2011 12:08 PM by Chuck Butler