Gov't Spending Pushes GDP Higher.
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In This Issue.

* The Risk Off sentiment remains

* U.S. Stock market is closed today.

* Chinese renminbi / yuan appreciates again.

* Gold sways back and forth.

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

Gov't Spending Pushes GDP Higher.

Good day. And a Marvelous Monday to you! Well, the East Coast is getting slammed by hurricane Sandy, so much so that the U.S. stock market is going to close today, and there are questions of whether or not it will open on Tuesday. I hope everyone in the path of Sandy are safe. Congrats to the S.F. Giants who swept the Tigers to win the World Series for the second time in the past 3 years! WOW! The games weren't really interesting to watch, as the Tigers' bats went silent. But, I'd rather win a boring World Series than to lose an exciting one!

Well. OK, I've started 3 different times this morning, and each time I've had to erase what I wrote. So this time I'm going with what comes from my mind! Well, on Friday, I did my Continuing Education testing, and Chris told you about the risk off trading that took a grip on the currencies and metals. The risk off trading continued throughout Friday, and except for the Asian currencies, the dollar remains well bid this morning. We could end up with thin markets this afternoon, following the close of the U.K. markets. You know what the possibilities are when we have thin markets. and with the dollar well bid this morning, we could very well, so some major moves this afternoon.

I was reading a story this weekend about how U.S. exports are falling to 3 1/2-year lows. they blamed it on the slowdown in the global economies. Well, my view from the cheap seats is that the price improvement of the dollar has to share the blame here. and I know that this price improvement of the dollar is not high on the Fed's or the U.S. Gov't's hit parade! How will they pay down debts if they can't get the dollar to weaken more? The Fed has done their part, by keeping interest rates near zero, and telling the markets that they are warranted to stay there through 2015. They have implemented 3 rounds of Quantitative Easing (QE), a thing called Operation Twist, and ballooned their balance sheet to the size that would scare the pants off most investors in the U.S. dollar.

The Gov't has done their share of the heavy lifting too, with their exploding debt accumulation. So, why isn't the dollar going to hell in a hand basket? Well, patience, young grasshoppers, patience, it can't all happen at once. the powers that be, need to keep the dollar around for awhile longer, so they can't have it collapse all at once. But a steady decline, with circuit breakers built in, appears to have been in place for the past 11 years.

Ok. so, I told you that the risk off trading was in place, except the Asian currencies this morning. The Chinese renminbi/ yuan was allowed to appreciate even further against the dollar in the overnight trading, and with the renminbi / yuan back on the rally tracks VS the dollar, the rest of the Asian currencies can fall in step. There's renewed optimism in China, and I would think that it's warranted, given the economic data that we've seen the last couple of weeks.

The one Asian currency not joining the rest of Asia in this rally VS the U.S. dollar, is the Japanese yen. I told you last week about the rumor going around that the Bank of Japan (BOJ) was going to announce an additional 10 Trillion yen of bond purchases, and that sent the yen to the woodshed. Well the BOJ hasn't announced anything so far, but that doesn't mean nothing will be announced. Shoot Rudy, the Japanese Gov't has requested that the BOJ make the total 20 Trillion yen in bond purchases. So, when it does get announced, I expect it to be 10-15 Trillion yen.. And with the 10 Trillion already priced into the yen, the extra 5 Trillion would be another blow to the yen's value.

I see this as a race with the U.S. "I see your $40 Billion in bond purchases a month, and raise you 15 Trillion yen! These two countries leaders deserve each other.. one day, they'll have all that cash dumped on the floor for it they will have reached their intrinsic value and the leaders will get to roll around on the floor, admiring what they did to their respective currencies. UGH!

Gold continues to swing back and forth in intraday trading, and while I fully understand the dollar appreciation pushing the price of Gold lower, I still don't understand where the price appreciation is that would have gone with China buying 512 Tons of Gold this year, and India, last year's biggest buyer of gold, noting that the lower prices of gold, have brought a "notable pickup" in volume. With NYC under siege, from hurricane Sandy, the CME (where gold trades here in the U.S.) is going to be closed today.. So, once London closes and heads to the pubs, Gold will be steady until the overnight sessions in Asia pick up the conn.

Given the game of poker that the Fed and the BOJ are playing with stimulus the coin of realm, I would think Gold would be well bid and pushing higher, on a daily basis. So until that happens I'm going to climb up on a billboard and stay there! No wait, Chuck, you're not to good with heights. Ok, so I can't do that! But, I could. Nah. forget it, nobody cares! Only Gold holders understand.

Did you see that the final print to 3rd QTR GDP came in fractionally higher than the previous post of 1.9%... at 2% growth, everyone can get a warm and fuzzy about the economy, right? I think you know I'm not buying that! A surprise positive in the quarter was a strong contribution from government spending led by Federal spending and specifically defense spending. Exports, as indicated above was a drag on the quarter.

Without Gov't spending, the economic growth here in the U.S. would be negligible at best, but don't let that get in the way of a "feel good story". My friend, and economics guru, tells me all the time that this is normal, that the Gov't has to step in to make up for the lack of growth from domestic demand. I always argue with her, and ask the question, why? Why does that have to happen?

This morning, we get two of my fave data prints. Personal Spending and Income. well. I also read a story this weekend that made me shake my head in disbelief. the story centered around how consumer spending was picking up here in the U.S. and that it could very well make up for the losses in exports in the 4th QTR. the story's writer, argues that U.S. consumers have worked hard on reducing their debt the past couple of years, and fixing their balance sheet. Boy, I wish I could believe that! Yes, those that have jobs probably did get the bejeebers scared out of them and reduced debt, but what about all those unemployed no matter who's numbers you use? To me, it feels like we're going right back to our bad habits again. Spending more than we make.

I read in the paper this weekend that local banks were stepping up their lending to less than credit worthy people again. Soon, we'll begin to hear about credit expanding. However, let me say this. the way I think most consumers see this, is that why wouldn't they go out on a limb and borrow to the max again? They know now that the Gov't will step in and make it all disappear. and I'm going to stop there, because I've already probably said too much!

Then There Was This. as reported on Reuters. "Absent action by Congress, the country will face the so-called fiscal cliff at the start of next year, a combination of lower spending and higher taxes that is expected to extract about $600 billion from the economy.

Many economists think every dollar of deficit reduction will subtract nearly the same amount from economic growth.

By that measure, the current course could cause the economy to contract by 0.5 percent in 2013, according to estimates by the Congressional Budget Office (CBO) that have been largely embraced by Wall Street and the U.S. Federal Reserve.

But research by economists in academia and at the International Monetary Fund suggests a dollar of deficit reduction could drain as much as $1.70 from the economy, making the prospective belt tightening much more dangerous.

"You can take that 0.5 percent contraction and double it," said Barry Eichengreen, an economist at the University of California, Berkeley."

Chuck again. yes. but we have to go through with all of this folks. I just talk about it so that it's on your mind, and you can prepare for reduced economic growth next year. And while the dollar could get some love from the reduction of deficit spending, I doubt it the markets will be fooled by the games people play. the plan calls for $1.2 Trillion in deficit spending cuts, over the next 10 years. And. the cuts are on future spending increases. So, in 10 years, we could very well have done nothing, nada, zilch, zero, a big fat goose egg!

To recap. The bias to buy dollars that began on Friday, remains in the markets this morning, as the overnight markets failed to reverse the risk off sentiment in the markets right now. The U.S.3rd QTR GDP printed at 2% on Friday. and without Gov't spending, it would have been negligible at best! The Asian currencies, led by the Chinese renminbi/ yuan continue to be steady Eddie Vs the dollar, except for Japanese yen, who's playing a game of poker with the Fed right now.

Currencies today 10/29/12. American Style: A$ $1.0360, kiwi .8210, C$ $1.0010, euro 1.2905, sterling 1.6065, Swiss $1.0680, . European Style: rand 8.7050, krone 5.7735, SEK 6.6825, forint 220.25, zloty 3.2125, koruna 19.3850, RUB 31.45, yen 79.55, sing 1.2210, HKD 7.7505, INR 53.99, China 6.2435, pesos 13.04, BRL 2.0290, Dollar Index 80.18, Oil $85.61, 10-year 1.73%, Silver $31.95, and Gold. $1,712.25

That's it for today. Well, judging from the responses to my Pfennig & Pfriends post yesterday, I hit the nail on the head of what people want to see. I even had a couple of readers say they were going to write me in for President! King. I would rather be King! HAHAHAHA! Seriously though, thanks to all who sent me a note in response to yesterday's post.. I sure hope you all are enjoying the Sunday Pfennig & Pfriends letters. I won't answer the bell to the office today, no biggie, just can't answer the bell today.. And with that. I thank you for reading the Pfennig, even on Sundays! Now go out and make this a Marvelous Monday!

Chuck Butler


EverBank World Markets



Posted 10-29-2012 12:04 PM by Chuck Butler