Dollar ends the week drifting even lower...
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In This Issue.

* Dollar continues to drift lower...

* Global growth expectations increase...

* Japan introduces a new word to the markets...

* Thanks to Loraine for the doughnuts...

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

Dollar ends the week drifting even lower...

Good day. It is Friday - the end of what has been a very long week for me (these 5 day work weeks are tough!). I had a busy day yesterday as I spoke to two different reporters and managed to get a quote or two on the newswires. As you can probably tell, I really enjoy speaking about the markets and the advantages of diversification. I've also enjoyed getting to share my thoughts with all of the Pfennig readers over the past week; Chuck will be back in the office on Monday after returning from his summer vacation. That should put readers in a good mood to start today's Pfennig!

The dollar bulls have taken the month of August off, and the slide continued yesterday with the dollar dropping vs. every major currency. The morning started off with the weekly jobless claims coming in just 2k below expectations. There were 333k new jobless claims filed last week, a slight rise from the previous week's 328k but still near recent lows. Continuing claims ticked up a bit, and the markets seemed to look at the overall tone of the data as supporting a push for the taper towards the year end. The equity markets certainly reflected the thought we will continue to see stimulus as they reversed a three session slide.

We will end what has been a fairly slow data week here in the US with the release of Wholesale Inventories which are expected to have expanded at a .4% rate during the month of June following a decrease in May. Next week will bring us a bit more information to try and gauge the health of the US economy as we will see the Monthly Budget numbers, Retail Sales, PPI, Weekly jobs numbers, CPI, TIC flows, Capacity Utilization, and Housing starts. Should be plenty for the markets to digest! We will also have a couple of important Fed Heads speaking next week, as both Lockhart and Bullard will be sharing their thoughts on 'tapering'.

This week we had Fed Heads Fisher, Evans, and Pianalto all share their thoughts on when the Fed should begin to pull back some of the stimulus. "I would clearly not rule" out a decision to start dialing back purchases at the September meeting, Chicago Fed President Charles Evans said on Wednesday. "We've seen good improvement in the labor market, there's no question in my mind about that." Certainly sounds like Evans will be voting to start a taper in September, which is a bit surprising as he has been one of the most vocal proponents of the record stimulus. Cleveland Fed President Sandra Pianalto also sounded like she would be in favor of starting to taper in September during comments yesterday. "Employment growth has been stronger than I was expecting, and the unemployment rate today is more than half a percent lower than I projected it to be last September," she told an audience yesterday. "In light of this progress, and if the labor market remains on the stronger path that it has followed since last fall, then I would be prepared to scale back the monthly pace of asset purchases."

So both Evans and Pianalto seem to be in favor of scaling back as early as September, and Fisher, one of the most vocal critics of the QE programs has repeated his calls for a moderation of the bond buying program. "You hear a choir" from Fed officials this week that "if things go as the committee expected, then I would expect to dial back," Fisher said on CNBC yesterday. I'm pretty sure St. Louis Fed Head Bullard will be encouraging a quick exit from the record bond buying also as he has traditionally been one of the more hawkish members. But what is a bit confusing, is in spite of all of this Fed head talk, the markets seem to be thinking the bond buying will continue through September with the first cuts coming in December. The currency markets are certainly reflecting a December taper. Or maybe instead the recent move by the dollar isn't just based on the taper talk, but instead these currency traders are actually looking at global growth projections (novel idea!).

Data releases in both Europe and China this week have indicated the global economy is back on a growth path. Reports out of Germany show the largest European economy is expanding, and economists expect the GDP report due out in Europe on August 14 will show the euro-zone region returned to growth in the second quarter. Chinese data showed that the world's largest emerging economy (I question how long we will continue to call China an emerging economy) has stabilized. While a further reduction in growth is still a possibility in China, recent data suggests the downward spiral has ended. This was seen as good news for the Australian economy and commodities in general which had been in a downward slide in conjunction with the Chinese slowdown.

The Canadian dollar is certainly one commodity based currency which has been hit hard in recent trading. The loonie started the month of August with a 7 day slide vs the US$, but that slide was reversed yesterday after the improved trade data from China and Germany improved projections for commodity demand. The Canadian dollar has also been helped by the weekly jobless claims which signaled that the US economy is improving - the US is still Canada's largest trading partner. According to a Bloomberg article I read last night (thanks Ari), several foreign exchange forecasters are raising their outlook for the loonie. The story said that speculation of a rise in interest rates by the Bank of Canada has been kept alive by recent reports on consumer spending in Canada. Several of the major currency trading houses have increased their estimates of where the loonie will be trading at year end, certainly a good sign for those of you who own the Canadian dollar as part of your diversified currency portfolio.

The commodity rebound also helped the Mexican peso and Brazilian real - both of which have come under selling pressure recently. Gold also had a positive day yesterday but is trading off a bit this morning. It was nice to see the big move higher on the precious metals yesterday, but it looks like it may turn out to be just temporary. With the amount of liquidity being pumped into these markets, I have to believe the precious metals will eventually catch a bid and start another extended move higher.

One central bank which has been working overtime trying to pump liquidity into their market is Japan who introduced a new word into the financial press yesterday. Japan's national debt exceeded 1 Quadrillion yen for the first time yesterday. That is 1,000,000,000,000,000 - a one followed by 15 zeros; the sheer size of the debt is pretty amazing, and the current Japanese administration seem intent on expanding the debt even further in an attempt to create inflation.

But eventually Prime Minister Abe is going to have to figure out how to get some of this debt paid off, and he has started to float ideas of new taxes in order to try and pay down some of this debt. The current sales tax of 5% is set to increase to 8% in April of next year and then to 10% in October of 2015. But Abe still has the power to postpone the rise if he doesn't think the economy can withstand the additional austerity measures. Abe is said to be working on other ideas on reducing Japan's massive debt burden which currently stands at more than twice the size of the economy.

But as Chuck has told readers in the past, Japan's debt is mostly 'self financed' with Japanese savers owning the vast majority of this debt. While the US debt isn't as large (yet) the fact that much of our debt is owned by foreigners places additional risk on the US. Debt levels in the industrialized world definitely need to come down, and the introduction of 'quadrillion' is just another sign of how out of control debt accumulation has become.

Then there was this. You can probably guess that most of us here on the desk are information sponges. It comes with the territory, as the currency markets are directly linked to the global markets and it is an awfully big world out there. Each of us has favorite sources of information, newsletters or magazines which we always make sure we read. One newsletter which I enjoy reading is written by Dennis Miller and is aptly named Miller's Money Weekly. This weeks newsletter hit on what should be a familiar theme for readers of the Pfennig - the internationalization of your investment portfolio. I'll share a few paragraphs of Dennis' newsletter here, and would encourage you to go out and read the entire edition by clicking here: . Now here is Dennis Miller:

So here I sit at my computer, trying to find the magic words to motivate our readers to explore a subject that might be a little scary, but it's also the best avenue I know of to prevent our life savings from being wiped out in either a high inflationary or a deflationary market. OK, here goes: regular people like you and me should consider internationalizing some of our assets. I hope folks don't stop reading at the last sentence, thinking this does not apply to them.

There is something about the subject of internationalization that turns off a lot of people. I hear comments like: "I'm not leaving this country. My family is here." Or "That's for ultra-rich people, drug dealers, and Tina Turner." Or the one I find really frightening, "I'm keeping my money right here where it is safe and protected by the government."

The Most Powerful Thug

I have quizzed many investors who have internationalized a portion of their financial assets, and there is one common line of thought among them. As a government grows, it needs to confiscate a larger portion of private wealth to support its bureaucracies. It also needs to reallocate private wealth to bribe voters and stay in power. It finds ways to "enhance revenue," as opposed to shrinking its bloated bureaucracy. Hell, our government probably spends a few million tax dollars on a politically connected public relations firm to come up with euphemistic terms like that. Governments are parasites; they must siphon wealth from the producers to survive.

For a government to siphon off wealth efficiently, it must know where the wealth is, set up ways to take it, and have a strong enough police force to make sure citizens comply. The intention is to make it easier to pay up than go to jail. Even people with modest nest eggs are constantly looking for ways to legally protect their wealth. Lawyers love it, since it means citizens need a variety of trusts and complicated legal avenues for minimizing taxes. That's part of the game. As governments press on, the stakes escalate, taxes increase, and we have to escalate our efforts to protect ourselves.

Look to New Jersey or France-which recently passed "millionaire taxes" to facilitate going after the super-wealthy. A year later both governments found that the tax revenue they received from the ultra-wealthy had dropped even though they taxed at a much higher percentage of their earnings. What happened? The wealthy moved and took their money with them. Frankly, I'm amazed that the political class seemed so surprised. Instead of more tax dollars coming in, they ended up with fewer. The next move-look for additional ways to "enhance revenue."

Added Benefits to Internationalization

Not all of the reasons for going international are defensive. Offshore investments not only offer good investment choices that are not available in the US, they can also provide a tremendous advantage for protecting against inflation. When the dollar inflates, its buying power drops in relation to other currencies. Inside my offshore Roth IRA, I have investments denominated in eight different foreign currencies. As the value of the dollar decreases-which it has for the last 100 years-owning assets denominated in a currency that is increasing in value can offset those effects.

I bought a stock on a foreign exchange that could have been bought here in the US. When I sold it for a nice gain, I realized that not only did I take a gain on the stock, I also had an additional profit due to the foreign currency increasing in value against the USD.

My goal today is to help our readers understand why a lot of investors, even with smaller portfolios, are looking outside the US to protect themselves and their nest eggs. Internationalizing some of our assets is a darn good insurance policy. How many get-togethers have we had where friends expressed concern about the government and the direction the country is going? The next step in the government chess game will be instituting capital controls, like Argentina has already done. That means the amount of money citizens can take out of the country will be tightly controlled by the government. If we wait until that happens, it will be too late.

Thanks to Dennis for letting me 'borrow' his thoughts to share with readers this morning.

To recap. The dollar continued to drift lower, as the major currencies rallied on renewed signs of global growth. The Fed Heads are all sounding like the taper will occur in September, but the markets seem to be hedging their bets toward December. The Canadian dollar benefitted from a rise in commodities, and many currency forecasters are calling for a further rise in the loonie. Japan introduced us to a new word as their debt reached 1 quadrillion yen. And I close today's Pfennig with some thoughts from Dennis Miller.

Currencies today 8/09/13. American Style: A$ .9162, kiwi .8019, C$ .9707, euro 1.3375, sterling 1.5527, Swiss $1.0864. European Style: rand 9.7625, krone 5.8415, SEK 6.4866, forint 222.55, zloty 3.1303, koruna 19.3396, RUB 32.8755, yen 96.55, sing 1.2584, HKD 7.7555, INR 60.86, China 6.1668, pesos 12.5771, BRL 2.2846, Dollar Index 81.02, Oil $103.87, 10-year 2.58%, Silver $20.2645, Platinum $1,490.85, Palladium $739.90, and Gold. $1,309.70.

That's it for today. I have to give a shout out to Dane's girl Loraine. While putting the finishing touches on the Pfennig yesterday morning I overheard Mike, Christine, and Dane having a conversation about DOUGHNUTS. After hitting the send button I walked over to the counter behind the desk where Chuck typically places the breakfast sandwiches he picks up for everyone, expecting to see these doughnuts everyone was talking about. Turns out there was no doughnuts, and the conversation was just that - ALL TALK. But after a short while Dane excused himself and after a few minutes he came walking back up carrying a dozen warm doughnuts! He had mentioned that I was looking for doughnuts, and Loraine ran by the local doughnut shop and dropped them by. Yahoo!! I think we need to have a conversation about a BREAKFAST CASSEROLE this morning (hint hint). For those of you who can pick up KMOX, our own Ty Keough will be providing color commentary as soccer powerhouse Real Madrid faces off against Inter on Saturday afternoon right here in St. Louis. The Rams didn't look too good in their preseason opener last night, letting the Cleveland Browns run all over our starting defense. Chuck will be back in the saddle Monday, but I think Mike and I will be sharing duties again at the end of the week as Chuck heads out west. Hope everyone has a Fantastic Friday and a Wonderful Weekend. Thanks for reading the Pfennig!!

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 08-09-2013 1:26 PM by Chuck Butler
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