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US "Turkey" Dollar Getting Stuffed Part I Randolph Buss Undoubtedly all you turkey & stuffing eaters have now recovered from your holiday treats and indigestion and now grudgingly found your way back to the office, or wherever happens to be ones gainful place of employment. Albeit not before going out and blowing $8 billion dollars on the holiday shopping. US consumers, it seems, have not quite registered what's happening in the markets, or, maybe they have and just uttered "Aw, shucks, those foreigners ought to pull us out of our debt hole again. They've been doing it for ages". Yes, we have, to the tune of approximately $2.5 billion per day in investment inflows. Meanwhile, my darting eyes keep following the USD Index ….now venturing into 81 territory at this writing. If that isn't enough to scare the Americans, then nothing is. Most do not know what the USD Index is, let alone watch it. To my mind it's basically a health barometer - and the USD health looks rather sickly.
Everywhere I read articles are talking of the Dollar Demise. The ECB may just stand to the sidelines and let this current USD slide play out. They certainly have not stepped in yet. And the Asians are certainly fed up with buying the USD. The Chinese Yuan fixed USD-pegging does not look ready to change anytime soon….so exports keep rolling. The USD has been, historically, not where it is now since 1991, Q3 1992 and Q1 1995. This is "pain territory" - only question is whose pain ?
And on a weekly basis it has been falling about the last 12 weeks, rather unprecedented to my mind.
Yesterday's article - which I urge you to read and which is in the DINL news link section -- from Stephen Roach of Morgan Stanley did catch my attention though because although I can logically agree with the argument he puts forth, I cannot agree with it in reality. The notion that the world is fundamentally trade imbalanced is of course correct. Americans consume too much and save far too little. It's as simple as that. The Asians produce too much via massive labour advantages, and a so-called under-valued Yuan (Renminbi), thus producing a double advantage over the West and the US in particular. Equally, the Asians may also save too much, as Mr. Roach points out.
Where I diverge from Mr. Roach is in the psychology of the solution. Getting the Americans to save more, at their own behest, is to my mind purely wishful thinking. That is like asking a junkie to not get high any more while giving him free access to the drug of choice. Americans of this generation wouldn't know how to handle a 30s style market crash like our parents and grandparents did. Likewise, mantras of "don't consume anymore dear US consumer" but here's all the most illogical credit card and 0% financing schemes we can think of, so please, don't consume, just save. Come on Stephen, it ain't gonna happen. Meanwhile, asking the Japanese or Chinese consumer to not save and to spend more is going against an entire philosophy of life and culture to the asian mindset. It's embedded into their brains - save, buy only when you can pay cash, etc. In effect, it's like asking a guy in Texas cattle country to eat rice balls and raw fish - it ain't gonna happen.
So where does this leave us ? I think it leaves us with bad tasting medicine. What is that? Keenly rising US interest rates, if the Fed was serious about battling a weak dollar. If they are not serious, then much higher inflation - the Fed will simply continue printing dollars. And if Bush does do a Social Security reform by taking out more debt, then save your dollars for toilet paper, or good winter kindling-starter in the fireplace - nothing burns slower than a tight wad of 20s. I think Greenspan has just called out the chimney sweeper to make sure the kindling will get plenty of fresh oxygen down the chimney flute… And finally, dear US government, don't expect hoards of Europeans flocking through NY air terminals with wads of Euros ready to buy USD goods -- word is out about Homeland Security Rent-A-Cop grunts…and we don't like to be manhandled and mal treated. At least that is the word I keep hearing on the street from Euro travellers. What a way to start the week off - Let's hope things will brighten up a bit this week. See you tomorrow…
29 November 2004
30 November 2004
Part II : US Bonding Glue
Mea Culpa. Mea Culpa. In response to yesterday's article I was chastised by a US reader as being a "Euro-weenie". Whatever that is, or what his intent was, I am not sure. In my response, I kindly pointed out that I am not pro-european or pro-american or pro-asian or pro-anything. I am neutral and just report what I see in the markets and what others have told me through first-hand knowledge. So much for not impaling the bearer of bad tidings on a wooden pole. It is interesting though how defensive some people can get at other people pointing out the obvious. To bring up a german(e) quote "Wahre Bildung kennt kein Neid" or "True knowledge, or education, knows no envy" is something I always try and adhere to. Moving on to the markets …
Continuing our Stephen Roach of Morgan Stanley theme, here's a snippet of one of his latest articles on the US consumer excesses:
Financial markets have an uncanny knack in restoring a sense of order to a dysfunctional world. The dollar is now center stage in this global wake-up call -- as well it should be, in my view. But dollar depreciation is not the endgame of global rebalancing. It is the means toward the end -- a potential trigger for a long overdue realignment in the mix of global saving and consumption. By failing to face up to the imperatives of rebalancing, the world has collectively created the ultimate moral hazard -- a US consumer that is now "too big to fail." This is a serious warning sign. The key to a successful global rebalancing, in my view, hinges critically on facing up to the risks of the world's most serious excesses. The over-extended American consumer is at the top of that list. And a weaker dollar could well be key in forcing the interest rate adjustments that might well temper the asset-driven excesses of US consumption. This is a shared responsibility that the world must now collectively redress.
Long ago, I learned that most of the time it doesn't pay to bet against the American consumer. There are rare occasions, however, when that rule doesn't apply. That was the case in the early 1970s in the aftermath of the first oil shock. Back then, as a young staffer at the Federal Reserve Board, I was chastised by Fed Chairman Arthur Burns for being too negative on the US consumer. He argued that I didn't appreciate the unflinching cyclical resilience of the US consumer -- a resilience that, ironically, was about to give way to America's first consumer-led recession. A lot has changed in the ensuing 30 years. But for very different reasons, I now believe that another exception is in the offing. The American consumer is an accident waiting to happen. The sooner the world comes to grips with this problem, the better the chances of a successful rebalancing.
Now, as I pointed out in yesterday's article, although the US consumer is certainly on the top of the list of things to be corrected, as Mr. Roach points out, the US consumer could likely not give a damn. The consumer, being human and being lazy, will not do anything. The fiscal authorities managing over the US Dollar are going to need to find the political wherewithal from within and hence force that consumer to "get with the program" as it were. How to do that ? Here comes the "wherewithal" part. The US authorities are now backed into a fiscal corner : the consumer will only respond - i.e. cut back consumption - on pain. Debt pain. That is done with rising interest rates. Make it so damn painful that easy credit is cut off and credit cards "hurt" when not paid off promptly. Make it hurt so much that saving is better than piling up debt at 2% rates. But wait, if rates rise then that starts to kill the housing construction market, kills the home mortgage owner and kills a lot of other things based around easy credit - autos, toys for big boys, etc. The so-called paper millionaire home owners, would then become only pauper hundred-thousand home owners. At which point many might simply be buried under their over-expensive house (not good for the politicians next election). This in turn toughens any fledgling economic recovery to say the least. The US consumer has simply had it too good after the 2000 market crash as fiscal authorities could not face up to the true facts and pumped billion dollar liquidity into the markets. That liquidity and laziness is now coming home to roost on the USD Index.
Getting back to at least part of the "global imbalance" solution. Higher US interest rates. In looking at the long-term US bond, I observed yesterdays drop - what a doozy. We see a bearish formation in progress which the markets seem to be hinting at.
 With the upcoming FOMC meeting in December and the US jobs report out this coming Friday, it will be interesting to see what happens. If the jobs report comes in "ok" then we might see a 25 bp rise - in line with so-called Greenspan "paced" increases. If the jobs report comes in bearish, then will the economic recovery be stuck in the mud ? Surely the movement in the US long bond will be a forbearer of the ungluing of the US economy - and hence the US consumer. The only question is for me, will the US fiscal politicians have the wherewithal to stomach a further US Dollar fall and the accompanying consumer pain? I really have my doubts - so again it comes down to the market itself. I think the market will do what is finally necessary - fiscal authority tinkering - or not.
Randolph Buss / Berlin, Germany
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Disclosure and Disclaimer Statement: This document is intended for informational purposes only. DINL is not a registered financial advisor in the USA. Not advice or intended as advice. The author has not received any payment or reimbursement of any nature for writing this article. The author's objective in writing this article is to raise awareness within the reader and to further their understanding of international and/or monetary issues and to encourage their own further due diligence / research. Neither the information nor the opinions expressed should be construed as a solicitation to buy or sell any stock, currency or commodity. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions.
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Randolph Buss, © copyright 2004
Berlin, Germany
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