US lawmakers still can't get together on a debt plan.
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In This Issue.

* Still no solution to the debt ceiling...

* Moody's places Spain on review...

* High costs of Swiss National Bank's intervention...

* July will close out as a good month for the currencies...

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

US lawmakers still can't get together on a debt plan.

Good day. The politicians still haven't figured out a way out of the corners they have backed themselves into, and the debt ceiling deadline is now just 4 days away. Rep Boehner could not even scratch enough of his own party together to vote on the House bill, which really doesn't matter as it faced certain defeat in the Senate. It is becoming more and more likely that we will reach August 2nd without a raise in the debt ceiling, but will this mean a default?

President Obama and the officials of the Treasury department will lay out their plans in case the debt impasse goes past August 2nd, detailing the order in which the available money will be spent. Interest and Principal payments on US treasuries will likely be the first priority, and we will likely be able to stave off a default for a few weeks. But a solution must eventually be found (most likely a short term raising of the debt ceiling with a first attempt at cutting spending). It looks more and more like this debt debate will continue well into 2012. I just hope we come out of all of this with REAL spending cuts and REAL tax reform. That is the only thing which will create a solution with any sticking power.

The rating agencies aren't letting the US debt impasse distract them from what is happening in Europe. S&P downgraded Greece's credit rating following closely behind a similar downgrade by Moody's earlier in the week. In a more surprising move, Moody's Investors Service put Spain's credit ranking on review for a possible downgrade. Spain had remained 'under the radar' throughout the European debt crisis, but the move by Moody's has brought them back into focus. The problems in Spain are nowhere near the dire situation in Greece, but the size of Spain's economy raises the crisis in Europe to a whole new level. According to the Financial Times, Spain has succeeded in trimming its deficit from 11.2% of GDP in 2009 to 9.2% in 2010, and Spain's public debt stands at 60.1% of GDP compared to Greece which has 142% debt to GDP. Hopefully this will simply be a warning shot and Spain will be able to continue to improve its debt situation.

The rating agencies are certainly working overtime lately with all of these debt crisis. But where were they when all of these countries were piling up these massive debts? And a better question is how did the markets allow such a debt burden to grow so large? Obviously everyone simply turned a blind eye to the pile of debt which was accumulating, as the banks and financiers happily created and sold debt for these countries and the elected officials eagerly spent the newly found funds in order to give their constituents everything they had promised. The financiers made money and the politicians got reelected, what a deal! But the short term gluttony came at a long term price.

The Economist magazine has an excellent opinion piece addressing what they see as a leadership vacuum in both Europe and the US. Here is a link to the entire article: . The story begins with the following paragraph: "A GOVERNMENT'S credibility is founded on its commitment to honor its debts. As a result of the dramas of the past few weeks, that crucial commodity is eroding in the West. The struggles in Europe to keep Greece in the euro zone and the brinkmanship in America over the debt ceiling have presented investors with an unattractive choice: should you buy the currency that may default, or the one that could disintegrate?"

That is the choice which the western leaders have thrust upon investors, and many will undoubtedly be looking for other places to park their funds. The western debt crisis will probably have a long term impact on global financial markets, hastening the downfall of the US$ as a reserve currency and pushing investors toward the emerging nations. The article goes on to describe how what is happening in the West is a copy of what occurred in Japan two decades ago. They point to a lack of political courage. Politicians in both Europe and the US have refused to face reality.

I would encourage Pfennig readers to go out and get a copy of the Economist magazine as it is one of the best sources of economic information from across the globe.

The Swiss franc continued its march higher as the concerns over the European debt crisis and the failure of the US lawmakers to come together generated more interest in the safe haven of Switzerland. Chuck has been watching the Swiss franc from Vancouver, and sent me this note last night:

Well. we can begin to watch Switzerland this morning. As long time readers, you all know that I've documented how the Swiss National Bank (SNB) had been selling francs to keep the currency from getting strong. That effort began around 95-cents. the franc today is about $1.25. So, obviously, their efforts did not work. But now, there new / old plan may do the trick.. There are rumors going around that the SNB is thinking about dusting off a program they held in place many years ago. Charging interest for deposits. this again, would be to stem further franc appreciation. These Central Banks are doing what they can to prop up the dollar, folks. Just so you know.

Chris again. A story came across the desk this morning announcing the Swiss central bank had sustained a first half loss of 10.8 billion Swiss francs ($13.5 billion). I'm not sure whether Chuck had seen this article last night before sending me his note or if he is just prophetic. These losses were caused by a combination of the decline in the value of the Euro and the SNB's attempts to intervene in the currency markets in order to keep the franc from appreciating. On the positive side of things, the emailed statement from the bank announced it had quintupled its foreign exchange reserves in the 15 months ending June 2010. I guess that is the silver lining of all that intervention, but the only problem is that a majority of these reserves are sitting in Euros and US$. The report also said the SNB had actually decreased its gold reserves, so apparently they had to sell gold in order to raise the funds used for intervention.

Turning to the economic releases, Euro-region inflation unexpectedly slowed in July, though it remained above the ECB's 2 percent ceiling for an eighth month. The inflation rate declined to 2.5% from 2.7% in the previous month. Another report showed German unemployment dropped in July for a 25th straight month. The jobless rate held at 7 percent for a third straight month, the lowest since records for a reunified Germany began in 1991. This data certainly paints a picture of an expanding economy, but worries over the debt crisis is keeping European confidence down. A report out yesterday showed European confidence in the economic outlook weakened more than economists forecast in July. An index of consumer and executive sentiment in the single currency region fell to 103.2 from a revised 105.4 in June. This is the lowest since August of 2010 and well below economists forecast of 104.

Data released yesterday in the US was actually a bit more promising, and probably helped fuel the small tick higher in the US$. The weekly jobless claims fell below the 400k level, coming in at 398,000. But continuing claims increased to 3703K. Pending home sales were surprisingly strong, increasing 2.4% MOM and 17.3% YOY. Today we will see 2nd quarter GDP numbers which are expected to show an expansion of 1.8%. This would be the slowest pace of growth in a year as consumers cut back on spending.

The dollar was slightly higher across the board, with even the Aussie dollar and Kiwi taking a break. The Australian dollar fell below $1.10 for the first time in 3 days, but is still relatively strong at $1.09 and change. A commodity based currency which I haven't written about much is the Canadian dollar. The 'loonie' dropped overnight as the price of crude oil lost a couple of dollars. But the Canadian dollar is still going to end the month in the positive territory vs. the US$ posting a respectable 1.4% gain.

A recap of the performance of the currencies vs. the US$ seems to be a fitting end to today's Pfennig as we close out July. The best performing currency this month vs. the US$ will come as no surprise: the Swiss franc was up 5.21%. Number 2 was the New Zealand dollar which was up 4.68%, followed by the Japanese yen which increased 4.5%. Number 4 may come as a surprise to many of you, but is one of the favorites on the desk; the Singapore dollar is up 2.42% vs. the dollar during July. The Aussie dollar, Pound Sterling, and Canadian dollar round out the top 10 currencies, with gains ranging from 2.27 to 1.44%.

To recap. The debt crisis in the US continues, and the Republican dominated House can't even agree on a bill. Moody's placed Spain on a rating watch, and S&P cut Greece's rating again. The Economist magazine blames the debt crisis on a lack of leadership. The Swiss National bank books a big loss trying to keep the Swiss franc from appreciating, and Euro-region data is mixed. Data in the US was a bit more promising, but the debt crisis continues to put pressure on the US$.

Currencies today 7/29/11 American Style: A$ $1.0935, kiwi .8652, C$ $1.0519, euro 1.4255, sterling 1.6284, Swiss $1.2494. European Style: rand 6.7691, krone 5.4306, SEK 6.3693, forint 189.39, zloty 2.8118, koruna 16.9669, RUB 27.7462, yen 77.62, sing 1.2053, HKD 7.7945, INR 44.2188, China 6.4370, pesos 11.7578, BRL 1.5672, dollar index 74.453, Oil $96.70, 10-year 2.92%, Silver $36.615, and Gold $1,615.38

That's it for today. The end of a long week for yours truly, but I really enjoy getting the opportunity to share my thoughts with all of you. I'm looking forward to a relaxing weekend at home, and will try to stay inside to avoid the triple digit heat which is expected to continue to grip the Midwest. I am running late again, so I will end it here and get this out the door. Thanks to everyone for reading the Pfennig, and I hope you all have a Fantastic Friday and a Wonderful weekend!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 07-29-2011 11:27 AM by Chuck Butler