And the currencies seem to be recovering this morning too, from the recent go around in the ring with the risk aversion campers. The currencies (except yen), were last seen yesterday up against the rope, doing their best imitation of the rope-a-dope.

But… This morning… The markets are just giddy about two pieces of data from Europe… First, German Investor Confidence as measured by the think tank, ZEW, beat the forecasts, and came in at the highest level in 3 years! That’s right, not since 2006, as German Investor Confidence been this high… For those of you keeping score at home… The Confidence Index number soared to 56.1 from 39.5 the previous month! WOW!

Last week, I told you how the German GDP had posted a positive number, and therefore the economy had exited the recession. I don’t believe the German economy to be “out of the woods” yet though… There are still things that go bump in the night that could very well drag the economic growth down… But for now… The Eurozone’s largest economy is basking in the sun of not only exiting a recession but a strong Investor Confidence report.

The other piece of data that has the risk takers fighting back for ground that was lost last week, was the U.K. inflation data that printed at 1.8%… Now, that sounds pretty low right? Well… You might recall that the Bank of England (BOE) had forecast a fall to 1% of inflation in the 3rd QTR… The other thing that makes 1.8% more robust than it looks is that the BOE has an inflation target of 2%, so… It’s knocking at the door of 2%, eh? Can you hear me knocking? On the window… Can’t you hear me knocking? On the door…

So… As I said it “seems” that the currencies are fighting back… But the move has been smallish in nature, but at least the euro has gained back the 1.41 handle, and the Aussie dollar has gained back the 82-cent handle, and so on, and so on…

The TIC’s data for June that printed yesterday was quite strong… For Long-Term Treasuries, that is… The short end got ambushed and was so weak that the positive for the Long-Term Treasuries was wiped out by the selling on the short end…

This probably all those people that bought short term T-Bills last year in what they thought was a “flight to safety”… I’m sure they exited with some red in the numbers… They basically gave the Gov’t a loan, paid the Gov’t for that loan, and lost money… Great “flight to safety” I’d say… NOT! Safe Haven? What Safe Haven?…

There’s no information right now about what games the Gov’t played in these figures… I think that for now though we can believe in our heart of hearts that they are playing games, which means the question at heart is… When the Fed winds down their buying of Treasuries, what happens to yields… And in turn what happens to borrowing costs… And finally the economy. My opinion? It won’t be pretty… But neither will the monetizing of debt that the Fed keeps performing… So, it’s a case of pick your poison… I would prefer the quantitative easing / monetizing of debt to stop, and let’s take our lumps on the economy that the Gov’t has been so hell-bent in attempting to stop… Get it over with, and live to see another day, rather than prolonging all this bad stuff…

For instance, last week, I read an article that talked about how the Big Banks are still in trouble… That just stinks! See what I’m talking about here? If they had been told to close their doors a year ago, we would be probably be pulling our selves out from that mess now… But nooooooooo! Instead the Gov’t spent hundreds of Billions of dollars to prop them up, and a year later, they still have problems! That just stinks!

So far this year, and I know, these aren’t the Big Banks, but ones that have caused significant damage to the funds of the FDIC, there has been 77 banks close… 77 Banks folks! One of the banks that closed was sold to another bank, but with the Gov’t guaranteeing that the buying bank didn’t experience any losses… Well, that would be a big wouldn’t it? If the closed bank didn’t have losses, it wouldn’t be getting closed! My friend and excellent writer, David Galland, had this to say about these back door deals for closed banks…

“Note that bit about the government “agreeing to shield acquirers from certain losses on assets of the failed bank.” This sort of guarantee has become a popular backdoor way for the government to deal with various elements of this crisis, without the more overt method of writing a check to cover losses or, heavens forbid, actually letting the equity holders bear the brunt for having made a bad investment in a poorly run bank.

Instead, the government jiggers things to hand off the good assets of a bad bank to one of their buddies, while agreeing to shift the liability for the poor assets onto the backs of taxpayers – with the IOU due and payable at some point down the road.”

OK… Back to me… I would not want to go on from that last note without mentioning that EverBank who sponsors this letter, and is my employer, which is not taken lightly, is enjoying a very good run of deposit growth and earnings growth. We just posted the 2nd QTR numbers, and I’ll have them to give to you, as soon as the marketing people give me the details. I understand that they are quite good, once again!

The other piece of data that printed yesterday was the NAHB Housing Market Index, which printed a digit higher than the July print of 17… So, 18 is the index number, what does that mean to us? Well, first of all, the Index represents a survey of Home Builders of Single-Family detached homes, and is comprised of three surveys… 1. Present Sales 2. 6-month expectations 3. traffic of buyers. The index has a range between 1 and 100, with 1 being bad, and 100 being excellent… A figure above 50, suggests that survey participants are seeing good economic conditions for Home Sales.

So… Now that we’ve learned that in class today, who can tell me what an index reading of 18 represents? You, over there in the corner, please take the IPOD ear-phones out of your ears and answer the question! Yes… It means we have a LOOOOOOOONNNNNNGGGGG time to go before we get back to 50…

Today we’ll see Housing Starts data for July… And Building Permits for July… These too will probably show a small uptick in activity, but nothing close to what it should be. And… Let’s also keep in mind that the problem we have with Housing in this country is that we have a GLUT of inventory, and it continues to grow, given the record number of foreclosures that I talked about last week… So, what good does it do to have these two pieces of data print strong? Sure, somehow the builders are finding the money to keep building and employing people, but, I just don’t see why that’s a good thing overall… Given… The glut of inventory.

I just wanted to recap what we’ve seen in the past week… A very weak Retail Sales figure, that was supposed to be inflated with the Cars for Clunkers program sales, and was not! And we saw a huge drop in Consumer Confidence… No wonder stocks have taken it on the chin the last two trading days… And… You have to wonder where all those economists are now that claimed last week that the recession had ended! Ended? Over? It’s not over until we say it’s over!

Speaking of foreclosures… I would have to think that these days, these days I sit and think about all the things that I forgot to do, for you… No wait! I have no idea where that came from, well actually I do know who sang it, but I mean that I would just start typing that! UGH! Runaway fat fingers! Any way… I do think that these days, all those unemployed people that were losing their jobs all winter and spring are now having problems… That’s a sad thing, folks… Something that might have been at least delayed with savings… But, recall back to before this financial crisis began, savings rates in the U.S. had gone negative! That’s sad too… But has been turned around now that everyone sees how important it is to have a war chest of savings… Let’s hope we don’t ever get to the negative savings rate again!

At home, I use ATT-U-Verse which means my news when I log on, comes from YAHOO! Last night I logged in, and saw this on the front page of news items… So… I just had to click into it to see what it was all about…

“A USA TODAY/Gallup poll found that 57% of Americans think President Barack Obama’s economic stimulus either had no impact on the recession or made it worse, while 41% said the spending was good for the economy. More than three-quarters said they are “somewhat worried” or “very worried” that some of the stimulus money is being wasted.”

Hmmm…. Maybe there are more Pfennig readers out there than I imagined! Now, we need to make the other 41% see the error of their thinking, and get them to diversify a portion of their investment portfolio out of the dollar, and into the asset classes of currencies and metals!

And with that note… I think I’ll head to the Big Finish! No wait! I wanted to mention that the threat of hurricanes in the Gulf have pushed the price of Oil higher, and will continue to have an affect on Black Gold’s price!

Currencies today 8/18/09: A$ .8240, kiwi .6710, C$ .9050, euro 1.4120, sterling 1.6560, Swiss .9280, rand 8.05, krone 6.1410, SEK 7.26, forint 193.10, zloty 2.9525, koruna 18.14, yen 95, sing 1.45, HKD 7.7515, INR 48.75, China 6.8338, pesos 12.94, BRL 1.88, dollar index 79.18, Oil $67.75, 10-yr 3.50%, Silver $14.08, and Gold… $938

That’s it for today… My little buddy, Alex, has his first day of school today… He’s in the 8th grade this year… My, time has flown since he was just starting school! When I was a kid, we didn’t start school until after Labor Day… I remind him and my two other children that are both teachers, of that whenever August rolls around! My beloved Cardinals won a big game last night in Los Angeles… Of course I’m in bed sleeping by the time the 1st pitch is thrown! Keep it going, Cardinals… Just keep it going… I’m very glad that I was able to get in to a good orthopedic doctor and get that shot as quickly as I did… I wonder how long I would have had to wait, no… Never mind I’m not going there! It’s time to hit send… So… Let’s get going on that Terrific Tuesday!

Source: German Investor Confidence Soars!

Before we all start to get too excited, there’s the small matter of the plunging pound – and thus higher import prices – to deal with. Yet on the surface, the so-called ‘factory gate’ figures do look pretty good.

Prices charged by manufacturers dropped 0.6% from a month earlier, the first decline since October 2006 and the biggest since records began in 1986, according to the Office for National Statistics. And it was all rather unexpected, as the median forecast by the 29 economists surveyed by Bloomberg was a 0.1% increase. What’s more, raw material costs actually declined by 2% from July, the biggest drop since January 2007.

So is inflation really heading for the back burner?

It might be a good idea to keep the champagne on ice. Despite the latest pull back, the year-on-year factory gate numbers still look horrible. Output prices are still almost 10% up on last year, while input costs remain in the stratosphere, 26% higher than a year ago.

That all points, by the way, to a real squeeze on company profit margins. Last week for example, DS Smith, the owner of the Spicers office products brand, was complaining that a combination of slowing demand and higher raw material costs has hurt first-quarter business.

Of course, it’s not the Bank of England’s prime job to worry about industry’s profits, but about the headline inflation rate. The CPI -consumer price index – is currently at 4.4%, its fastest pace for a decade. It has been above the stated 2% target for 10 months. As Bank of England governor Mervyn King has already warned that CPI could be heading for 5%, which is so far away from that 2% that it’s no longer funny, he and his team of rate-setters really need to be quite confident about price pressures beginning to ease before they start lowering official borrowing costs.

That said, because of the ever more parlous state of the economy, Mr King and his henchmen received a fair amount of flak for not slashing interest rates last month. These producer price results mean that now there’s bound to be an increasing clamour demanding a rate cut soon. Particularly as oil prices, which climbed to a record high in July, have since dropped back sharply. Indeed, Brent crude was trading at below $102 a barrel by Mondays’ close, which is a near 30% plunge from the peak.

Read the Full Article

Source: Why the Good News on Inflation May Not Last

Manny Fontenla-Novoa, chief executive of travel operator Thomas Cook, reckons he’s seen no evidence of consumers cutting back or trading down on their annual holidays. In fact, he’s even planning to stick prices up by 8% next year.

In this morning’s Telegraph, Richard Fletcher muses that while consumers are willing to put off replacing their sofa or their car, “the holiday… is sacrosanct, or so it seems. Even in a downturn, there are winners and losers.”

There sure are. But holiday companies won’t be among them. Here’s why…

The boom’s over. Most people probably accepted that around about the end of last year, as it became obvious that house prices weren’t rising anymore. And as the year has worn on, they’ve also accepted that the wider economy is in trouble. House prices are tanking. Credit is getting harder to come by. Energy bills are shooting up – and it looks like their monthly payments may well jump too when they have to remortgage.

All of that is enough to make people feel that bit poorer. And what’s the first thing you cut back on when you feel poorer? Impulse buying. Think about it. If you take a stroll down the High Street on a Saturday morning, with money in your wallet, safe in the knowledge that your house price rose by another £1,000 last month, then you’re very open to temptation. New pair of jeans? It’s only £40. New flat-screen telly? Stick it on the house.

Read the Full Article

Source: Why You should Sell Travel Stocks Now

Don’t panic – yet – if you live in Britain, because we’re not talking about dear old Blighty. But across the Channel, Jean Claude Trichet is talking tough. He’s the president of the European Central Bank (ECB), in charge of guarding the value of the newest big kid on the global currency block, the nearly 10-year old euro.

And now he’s fast becoming the hero of inflation fighters everywhere. Because yesterday, amid the usual turgid guff that central bankers usually churn out when they’re doing nothing very much, he came up with a bit of a bombshell – an imminent interest rate rise.

Although key rates are being kept unchanged for now, the ECB’s Governing Council has been getting more and more twitchy about climbing consumer prices which have risen “significantly” since last autumn due to soaring energy and food prices. And now Monsieur Trichet and co. expect inflation to stay high for longer than it first thought, because money supply is still growing too fast.

So not only are Euro central bankers staying “in a state of heightened alertness”, they’re prepared to “act in a firm and timely manner to ensure that medium term risks to price stability do not materialize”, and to show “strong determination to anchor medium and long-term inflation expectations in line with price stability.”

In short, expect an ECB rate hike next month.

It’s certainly seems to have come as a bit of a shock to many analysts. Just a week ago, Capital Economics was fairly confidently predicting that with eurozone inflation set to ease later this year, “the next move in interest rates should be down”.

But it’s good to see that some central bankers this side of the Atlantic are still taking their jobs seriously and trying to maintain the value of their currency. Which, it seems, the ECB can do rather more easily than Bank of England governor Mervyn King.

He’d probably like to do the same as the eurozone, with UK inflation seeping above the 3% mark at which he has to pen an open letter to Chancellor Darling explaining what’s gone wrong, but his hands are tied while the UK economy is falling off a cliff. And it looks like the knots are getting tighter by the day, with the unwelcome news that Mr Darling has now decided to give Mr King some extra outside ‘help’ in “advising” the Bank about “financial stability”.

That sounds horribly like Government-speak for finding ways to fiddle around with the Old Lady’s independence, and specifically to find ways of altering the Bank’s 2% inflation mandate. That would be a serious mistake – changing the target again would just chuck any remaining financial credibility the UK has left, right out of the window.

Talking of being a credible inflation-battling central banker, US Federal Reserve boss Ben Bernanke certainly isn’t one, having presided over a cavalier slashing of American interest rates in the face of a worse inflationary storm than the ECB is battling. But to be fair to the Fed, not quite all his colleagues are in quite the same boat.

Richmond Fed president Jeffrey Lacker has just ‘fessed up to his fears that the Fed’s lending to securities firms introduced in March could stoke up problems in the future, because it might “induce greater risk taking, which in turn could give rise to more frequent crises”.

In other words, we could soon be right back in the same boom-to bubble-to-bust mess from which we’re now suffering.

Thank goodness someone in authority in the US has seen the dangers. Though it’s a shame that Mr Lacker isn’t running the whole Stateside central bank show. Then we might see some rate rises over there, too.

Source: Why Europe’s Got It Right on Inflation

And with inflation soaring, we can’t expect the Bank of England to cut interest rates this week to try to alleviate any of the pain.

To add insult to injury, the pound, our national virility symbol, has plunged against the euro, so we can’t even afford to go away from it all on holiday on the Continent. And we came last in Eurovision… again. We seem to be becoming the sick men of Europe.

If you can’t beat them, they say, join them. So has the time finally come to dump the poor old pound and plump for the euro?

Why Europe could be in as much trouble as the UK

With the euro now among the world’s strongest currencies, you might assume that the eurozone was in a much better state than Britain. But take a closer look and you soon see that plenty of problems have been cropping up on the other side of the Channel, as well as across the Irish sea.

Take housing. Last week’s Nationwide house prices survey showed that prices were down 4.4% year-on-year in May, the biggest fall since the early 1990s. That’s pretty grim.

But in Spain house prices have already fallen 15% across the board since September, according to the developers’ association (APCE). And in Ireland, house prices were down nearly 10% year-on-year up to the end of March.

Of course, the UK property market is set to get a lot worse. But the same could be said for Spain and Ireland.

Then there’s consumer confidence. In Britain this has crumpled, according to the latest GfK indicator, to its lowest point since Margaret Thatcher was ousted from office. Again, pretty grim. But the eurozone isn’t immune either – French consumer confidence has now fallen to its lowest level in 20 years.

And as for inflation, despite the European Central Bank’s (ECB) reputation as a hard-nosed inflation fighter, Europe’s having trouble with rising prices too. Last Friday’s figure turned out worse than expected, coming in with an annual rate of 3.6%, adding to what ECB president Jean-Claude Trichet has called policy makers’ “biggest challenge”. Despite the strong currency, that’s 0.6% higher than in the UK. Indeed, the pressure’s now building on the ECB for the next move in interest rates to be up.

And the broader picture for the euro isn’t looking a lot brighter than for the pound, either. Because long-term private investors are pulling their cash out of the eurozone at the fastest rate since the creation of the single currency, says a report by BNP Paribas.

Foreign direct investment in plant and factories has swung down over the past year to a negative €149bn (£117bn), including a drop to minus €19bn in March alone as the surging euro drove up relative labour costs in southern Europe. Add in a $280bn withdrawal of private funds from eurozone equities and bonds, and total outflows have exceeded €400bn over the last twelve months.

The euro is now suffering from the “reserve currency curse”, says Ambrose Evans-Pritchard in The Telegraph, as central banks in Asia, Russia, and the Middle East use it as an alternative to the dollar. “While Asian funding has helped ease the credit crisis in Europe, it has also pushed the exchange rate to damaging levels. The eurozone has gained financial flows, but has lost industrial and investment flows.”

BNP’s currency strategist Hans Redeke sees mounting signs of stress. “There are lots of ugly surprises in store as deleveraging finally hits Europe. Investors are going to stop treating the eurozone as if it were just Germany. We will discover in this downturn whether the eurozone is really an ‘optimal currency area’. This is the test”.

So, on reflection, maybe this isn’t the time for the Treasury’s great and good to contemplate dumping the pound. And if you’re still unconvinced, here’s what the FT’s Martin Wolf has to say. He’s such a staunch opponent of such a move, he’s even just criticised his europhile peers in print: “the Lex column argued last week that the UK was close to meeting the economic tests for joining. Lex is wrong.

Three reasons why our currency should be left alone

We’ve not been hurt historically by being out of the euro, says Mr Wolf. Between the first quarter of 1999 and the first quarter of 2008, Britain’s economy expanded by 28% compared with 21% in the eurozone as a whole and 16% in Germany. Nor has London’s position as a financial centre been hurt.

In fact, had the UK been a recent eurozone member, our present situation could be even worse. Our credit bubble would have inflated more, because euro interest rates have been lower. On top of that, now that the domestic spending boom is over, there’d have been no offsetting benefit from the recently plummeting pound.

Inflation may well now rise faster in the UK than in the eurozone, but at least we have some hope of controlling this. The Bank of England can set interest rates to suit Britain alone, rather than relying on the ECB, which is arguably far more concerned with how suitable interest rates are for Germany. If the BoE sticks firmly to its 2% inflation target, Britain will almost certainly veer into recession, but then so will the eurozone countries.

So forget the euro – our currency should just be left alone, to find its own level. Which of course, looks like it could well be considerably lower than it is now.

Source: Should Britain Dump the Pound for the Euro?

House prices are falling and retail sales are down. In the normal way of things, that spells deflation. But raw materials prices are soaring, and that spells inflation.

So what are we facing? Well, let’s look at that data in a bit more detail…

First things first. The latest survey from the Royal Institution of Chartered Surveyors found that 19 in every 20 surveyors reported falling prices in April. That’s the worst reading in the survey’s 30-year history. I probably don’t need to point out that this includes the 1990s crash. Meanwhile, inquiries by new buyers are falling at the fastest rate since Rics began recording the data 10 years ago.

Unsurprisingly, this is all having an effect on consumer spending. The British Retail Consortium reported that the total value of retail sales was up 1.9% year-on-year in the three months to April. That doesn’t sound too bad – but in the quarter to March it was 3.5%.

The “horrific” rise in the price of manufactured goods

But at the same time, inflation is rocketing. The price of manufactured goods rose 7.5% in the year to April, the fastest since 1986. The rise was far greater than City forecasts, and was described as “horrific” by Ben Broadbent of Goldman Sachs, and “nothing short of terrible” by Paul Dales at Capital Economics. Even if you cut out food, alcohol and petrol costs, ‘core’ inflation was still higher than at any time since 1995 (for more on this story, see: UK inflation soars past City forecasts.

And the breaking news this morning is that consumer price inflation has hit an annual rate of 3%, way higher than the City had expected, and just a tenth of a percentage point away from triggering another letter to the Chancellor. Bank of England governor Mervyn King had better get his pencil sharpener out. We’ll be following up this story on the website later today.

Meanwhile, import prices are climbing too, as the pound weakens. Import prices in the first quarter were up 10.1% year-on-year, reports the FT. “There is a wall of costs waiting out there to dump on the UK consumer,” said Geoffrey Dicks of the Royal Bank of Scotland.

But consumers are spending less, and house prices are falling. That points to falling sales, which makes price hikes a hard sell. And even if prices do rise, rising employment insecurity will mean workers have a tough time demanding higher wages.

Good argument. But as John Plender pointed out in the FT a couple of weeks ago, there is a problem with it. The whole wage-price spiral might not be happening in the developed world. But the developing world – the erstwhile workshop of the world – is another matter.

The end of cheap labour

The global share of the pie taken by labour (the workers) has fallen to a historic low. But now, “emerging market workers are battling for their income share.” When we’re talking about the end of cheap shoes, and the end of cheap vests, what we’re really talking about is the end of cheap labour. That means “the developed world will have to pay more for its imports.”

The other problem, Plender notes, is that even though emerging economies are experiencing rapid inflation (which would usually be bad for the currency – no one wants to be in a currency which is losing value), many are pegged to the dollar. So even though there’s more money around, in dollar terms, it can still buy the same quantity of goods. That puts more pressure on commodity prices as emerging markets gain more purchasing power over “globally traded commodities.”

So developing economies have stopped exporting deflation, and are now fuelling inflation both in raw materials (as they have always done), which is now feeding through to their exported goods too.

Why our government has good reason to seek inflation

And the truth is that here in the developed world, our policy makers have a very strong incentive to pursue inflationary policies. Why? Because our big problem is debt. And inflation decreases the value of debt. Good news if you’re in debt – bad news if you’re a creditor or a saver.

Of course, the flipside is that if the developed world can’t afford to buy all those exports from the developing world anymore, then China and other export-dependent economies could also face rising unemployment and slowing growth. That might take some of the pressure off prices, but would lead to more social unrest with potentially explosive consequences.

So what’s it going to be? Inflation or deflation? In the short term, Mervyn King will have to write another letter or two to the Treasury, that’s for sure. In the longer term, it’s hard to say, and it’s a subject we’ll be returning to regularly in the months ahead – but whichever we end up with, it’s going to be nasty.

Turning to the wider markets…

The FTSE 100 ended up 16 points at 6,220. Oil companies were among the main gainers as oil prices remained high.

Across the Channel yesterday, the Paris CAC-40 rose 15 points to end the day at 4,976. And in Frankfurt, the DAX-30 rose 32 points to 7,035.

On Wall Street, US stocks moved higher amid news that Hewlett Packard is nearing a deal to buy technology services group Electronic Data Systems Corporation for up to $13bn, reports the Wall Street Journal. The Dow Jones rose 130 points to end at 12,876. The broader S&P 500 closed up 15 points, at 1,403, while the tech-heavy Nasdaq jumped 42 points to close at 2,488.

In Asia this morning, Japanese stocks made gains, with the Nikkei 225 rising 210 points to close at 13,953, as higher earnings forecasts from camera maker Nikon and computer services group Fujitsu boosted confidence that the economy can withstand a US slowdown.

Crude oil was trading at $123.82 in New York. Meanwhile Brent spot was trading at $121.95.

Spot gold was trading at around $877 an ounce this morning, while silver was trading at $17.09. Platinum traded around $2,073.

Turning to forex, sterling was trading at 1.9524 against the dollar, and at 1.2571 against the euro. The dollar was last trading at 0.6440 against the euro and 103.60 against the Japanese yen.

This morning, more bad news for the housing market. Homebuilder Redrow said that reservations are running 50% below last year’s level, while its order book had shrunk by 27% to the end of April. Sales in the year through June will be 10% lower than its previous forecast, reports Bloomberg.

Source:http://www.moneyweek.com/file/46954/is-inflation-or-deflation-the-biggest-threat-to-the-global-economy.html