German Investor Confidence Soars

The currencies seem to be recovering this morning, from the recent go around in the ring with the risk aversion campers. The currencies (except yen (JPY)), 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 three years! That’s right, not since 2006 has 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 UK 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 third quarter. 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?

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 (EUR) has gained back the 1.41 handle, and the Aussie dollar (AUD) 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.

It’s 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 government a loan, paid the government 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 government 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 government 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 probably be pulling ourselves out from that mess now… But nooooooooo! Instead the government 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 have been 77 banks to close… 77 Banks, folks! One of the banks that closed was sold to another bank, but with the government guaranteeing that the buying bank didn’t experience any losses. Well, that would be a big IF 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 second quarter 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 earphones 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, 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 US 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!

The Daily Reckoning