George Soros Calls for More Stimulus Spending

Good day… And welcome to another week. Chuck is on his way to Vancouver this morning to speak at the big Agora Financial Investment Symposium later this week; so I will have the honor of bringing you the Pfennig over the next few days. But fans of Chuck shouldn’t get too upset, as he always sends me Pfennig Pfodder from the road. The euro (EUR) has certainly been on the move lately, and Chuck left me the following before signing off last week:

“Mid-morning last Friday, we saw the rug pulled from under the euro, after the single unit had recovered to 1.30. Yes, the euro traded at 1.30 on Friday morning, but that was before a consumer confidence report printed in the US and showed a HUGE drop!

“Now, fundamentals would have brought the dollar to its knees in the old days for printing a U. of Michigan Consumer Confidence report that fell from an index level of 74 to 66! But these days, things don’t always trade with fundamentals… As was the case on Friday…

“I did say to the boys and girls on the desk once the euro hit 1.30, that I thought it had gone too far, too fast, and profit taking will most likely take over from here… And while there was certainly some of that, the real pull on the rug came from the awful looking consumer confidence report… Which sent stocks reeling, and the ‘risk off’ mentality through the markets.”

Chuck often reminds us that traders can only ignore fundamentals over the short term, and the bad data released in the US on Friday finally caught the attention of international investors who turned back against the dollar. Investors now seem to have shifted their focus away from the European problems bringing their attention back to the US. Actions over the weekend illustrate just how dramatic this change in focus has been.

Moody’s rating agency cut Ireland’s rating this morning to Aa2 from Aa1, citing the Irish government’s ‘gradual but significant loss of financial strength’. Adding to the problems in Europe, the IMF and EU pulled out of talks with Hungary apparently leaving the leaders in Budapest to deal with their budget deficits on their own.

A couple of weeks ago, either one of these two stories would have been enough to send the euro tumbling, and the combination of the two would likely have caused a major sell off. But the euro held firm and actually moved a touch higher in European trading. It seems as if the poor fundamentals released here in the US have begun to outweigh the continued problems in Europe. The US seems to have regained the title of the uglier sister in this cut rate beauty contest.

Data released out of the US continue to disappoint, while euro-area data has been able to surpass expectations. On Friday the data showed the core rate of the consumer price index increased 0.2%, the most since October. Prices fell overall, matching the economists estimate of -0.1%; the third straight monthly decrease. Another report showed US consumer confidence is falling, as the U. of Michigan confidence number came in at just 66.5 compared to predictions of 74.

The inflation data and falling consumer confidence have renewed calls from George Soros and others for additional stimulus. Billionaire investor Soros said US lawmakers should not withdraw stimulus, as the US economy is still too fragile to survive without additional government life support. Soros remains a major contributor to the party that controls the White House, so his opinion definitely carries a bit of weight with the administration. As Chuck has hinted several times over the past few weeks, we are expecting to see another big round of government spending in an effort to pump the markets back up.

And the bond markets are certainly making it easy on the US to continue to borrow and spend. The Treasury bid-to-cover ratio rose 18% from last year’s 14-year high, according to Bloomberg. This bid-to-cover ratio is an excellent indication of the market demand for US debt, and it looks like investors are continuing to want to purchase the US IOUs. Another interesting fact from the Bloomberg story: For the first time since the government started collecting data central banks, mutual funds, and US banks are buying more government securities at the Treasury auctions than Wall Street’s bond dealers.

Foreign and domestic investors bidding directly at the auctions bought 57% of the $1.26 trillion in Treasuries sold this year, up from 45% during 2009. Friday’s data showed foreign investors were active in the markets, with Total Net TIC flows increasing to $17.5 billion from last month’s revised $13 billion. The high demand for US treasuries forced the 10-year rates below 3%, so apparently investors are more concerned with the global economic recovery than with actually getting paid a return for their investments. I still have trouble believing these investors will be happy sitting with these low rates for a full 10 years. No, they will be looking to swap back out of these ‘temporary’ parking places, and send US rates higher.

But for now, investors are happy just hiding out in the US treasuries, and concerns over global growth weighed on the commodity currencies. Both the New Zealand (NZD) and Aussie dollars (AUD) weakened over the weekend on concern interest rates in the two sister countries would remain on hold. The Aussie dollar fell to a one-week low versus the US dollar after Aussie Prime Minister Julia Gillard called an election for August 21. With the election date set, investors are betting the Reserve Bank will keep rates on hold next month, as they typically do not want to raise rates during an election month.

Bernanke will be addressing Congress this week, and it will be interesting to see how he handles the calls for additional stimulus. Look for big Ben to stress the need to keep stimulus measures in place, but to still warn congress against the long-term impact of deficit spending. Sounds contradictory doesn’t it? Yes, Ben will have to try to convince Congress, and the markets, that he is keeping an eye on the long-term impact of all of our borrowing; but he understands the need to keep the spending spigot open.

To recap… The euro moved higher after investors turned against ‘ugly’ data of the US. Inflation data encourage Soros and others to call for additional stimulus. Worries over the global recovery cause a commodity sell off; and Bernanke will probably be talking out of both sides of his mouth as he addresses congress.

Chris Gaffney
for The Daily Reckoning

The Daily Reckoning