Lou Thomas
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Latest Comments35 Comments
Dollar Valuations Built Into FOMC Cut?
I agree that the dollar is an animated corpse, jerked upward by deleveraging, without sufficient fundamentals to give it sustainable viability. But that deleveraging is still going on, and so the dollar still twitches. As for equities being over-valued, Nouriel Roubini opines that the markets could fall another 30 percent, and bases his conclusions on price/earnings.
Yesterday's rally is weird and unwarranted. Maybe something to do with the election? Nobody can seem to figure out what is causing it. Some combination of coming rate cut and Plunge Protection Team, perhaps...? Whatever it is, it will not last long. The Dow futures already are at negative 2 percent prior to Wednesday's open.
Whenever the market jerks upward briefly, as it did Tuesday, we see a pause in deleveraging, and the dollar trends downward, as does the yen. That gives a preview of what might happen when deleveraging actually ends. But that has not yet occurred.
It seems to me that bond liquidation could occur by foreign creditors (e.g., China) even without an rally in equities. If China has less incentive to export to the U.S. because of the tapping out of the U.S. consumer, and needs to start building its own middle class, it could take some of its dollars and try to spend them on its own population. I would guess that before that occurs they'll buy up everything in sight that they might possibly use through their SWF, a process that does not push the dollar downward so long as those selling the assets are doing so to get cash to pay dollar-denominated debts (i.e., the dollars they convert to euros or whatever to buy assets from distressed firms will get converted right back into dollars to pay the sellers' debts).
Frankly it is depressing to see everything falling apart so rapidly. Nobody really knows how this will turn out, and but here's my contribution to the confusion.
Golden State Asks Public Pension Plan for Help
If the U.S. government is broke, then where will the funding for this depression's green industry / infrastructure "WPA" come from? Government spending got us out of the last depression, but the parasites were more effective this time and have drained the host nation of its vital force.
An End-of-Quarter Dollar Rally in Face of Bailout Drama
Lately, while the target rate has remained at 2 percent, the effective rate has swung wildly as high as 7 percent and as low as about 1.3 percent. So, while public perception may be that the rate is at 2 percent, the effective rate is the result of the Fed's actual policies, as well as market conditions, including the overall reluctance that banks have to lend to one another.
The Fed fund futures mentioned in the article are settled at the effective rate, not the much more visible target rate, and so that is probably one of the main reasons that they do not accurately predict what the Fed is going to announce publicly as its target.
It occurs to me that since the dollar is extremely vulnerable, the Fed may not want to cut the visible rate, but may still be undertaking policies that attempt to lower it below the public target of 2 percent. I say attempt because in the current environment, dominated, as the article notes, by counterparty risk, this may not always be possible. Hence, the wild fluctuations in the effective rate, which usually follows the target fairly closely.
Since a rate cut must be supported by open market operations to inject liquidity sufficient to cause banks to lend to one another at the lower rate, and since the Fed has already swapped a great deal (all?) of its original 900 billion of good stuff for junk collateral, one has to wonder whether the Fed actually has the wherewithal to support a lower effective rate, but so far they are below the target at least some of the time. Didn't the treasury have to do a special bond issue to back $40 billion of the AIG bailout? That may have been the point that the Fed's assets were (at least temporarily) exhausted.
Regarding the LIBOR, while home equity loans were mentioned, the larger problem would seem to be ARMs, which are generally tied to the LIBOR. The ARMs are in the pipeline fully ARMed and waiting to explode in the coming months. If those adjustable rates are adjusted way higher due to LIBOR increases, it will make the calamity just that much worse.
Overall, a reasonable and well-considered article, IMHO.
Sell the U.S. Dollar into Strength
First paragraph: insult, no information.
Second paragraph: Gloating about unsupported claims of your success, without saying on what basis you made your decisions, or how your criteria differed from those presented by the article.
Third paragraph: Telling us what we all know already, that gold is presently down. Well, the dollar is presently up, too. Does that mean that gold will remain down and the dollar will remain up? Where is the analysis?
Fourth paragraph: OK, you kind of make a claim here that the problems in Europe are comparable to or worse than those of the U.S., but you don't even exactly say that, and you certainly don't say why you think this is the case. It is not a credible premise, for so many obvious reasons, but why should I bother to list them, since you haven't listed a single reason for believing that Europe is in anywhere near the terrible shape that the U.S. is?
I felt compelled to respond to you because of the especially arrogant attitude with which you made your unsupported assertions. Arrogance is only bearable if it is backed up by something of intellectual interest.
Sell the U.S. Dollar into Strength
I would disagree, however, that the dollar intervention was primarily intended to placate a (U.S.) public that is tired of inflation. That would not explain the participation of other central banks in the intervention, and the Fed could not have done this without a lot of help, or at least the tolerance of China and other major holders of dollars.
The reality is more complex. The U.S. owes more money than it can pay. Creditor nations have allowed the U.S. to run up a huge tab in order to build their own export industries, and possibly, if we can imagine them as being a bit diabolical, to put the U.S. into a weaker position. But in the process they have accumulated our moldy green scrip, which they've invested into our mortgage and equity bubbles, inflating them in the process, and thereby furthering a cycle of unsustainable consumption.
Now, it has become clear that the U.S. can never pay its debts. Even more importantly, the bubbles are popping, and the U.S. consumer is dying, and that is reducing the incentive that China and others have to keep propping up the U.S. economy and dollar in order to support exports to our (formerly) profligate consuming class. But if they pull the plug, then all of that green paper falls to its true value, and they have quite a lot of it. So, it is kind of a dilemma for everyone. And that is why so much energy is going into the various mechanisms of denial (e.g., bailouts, special lending windows, and so on) that postpone, and make worse, the final cataclysm.
The GSE bailout is the most recent and trenchant example. Here, the Federal government is "guaranteeing&quo... the debts of foreign investors. But, the Federal government already borrows a large percentage of its budget each day from those same foreign investors. So, who will be asked to invest even more money to pay for this Federal guarantee? Those same foreigners, of course! You could say that it is a Ponzi scheme, except for the fact that there are no new suckers to be added - it is borrowing from Peter to pay...Peter! So, Peter had better be a schizophrenic if you want that scheme to work out for very long.
Somebody asked where they should put their money if they take it out of the dollar. This is a good question, as there is no safe place in a world that is falling apart. But there are many things that will probably be better than the dollar! So, look around and see what you can find. I'm leaning toward German sovereign debt, myself, but the analysis on which that is based is complicated and tenuous, and I am just an amateur, not someone who does this for a living. But anyway:
It's clear that the main U.S. trade imbalance is with Asia and the oil producing nations. However, Asia in particular is very export-oriented, and so its economy will suffer a serious blow when the U.S. consumption machine finally succumbs. It will probably not be able to grow its middle classes quickly enough to take up the slack. Therefore, it will need to look for ways to expand in areas of the world that do have significant consuming classes. I see Europe as one of the main such areas other than the U.S. So, my thought is that China will sell U.S. Treasuries and GSE bonds and buy European bonds to push the Euro in particular up relative to the yuan so that they can sell some of the exports that used to go to the U.S. (that they can't absorb internally) there.
Also, I'm a bit more afraid of currency controls and other forms of intervention affecting foreign investors in China in particular than in Europe, although that's not based on a good understanding of China, but rather, just a lack of information and general uneasiness. But China has tended toward insularity in the past.
As for gold, once again, probably better than the dollar, but gold is a commodity, and we're headed into a worldwide recession - possibly a depression. Commodities tend to lose value as demand drops. How much agreement will there be that gold is a reasonable store of value, when what people really need is food. Ask King Midas about gold - you can't eat it. A fiat currency such as the Euro that is tied to a real economy that makes stuff that people really want might actually do better - but then again, maybe not!
Good luck, if you deserve it! If you don't, you know who you are - focus on human relationships to get you through the coming difficulties.
Job Numbers Don't Freak Out Dollar Bulls
This column doestn't tell us a lot that we couldn't have read from the charts, but it does provide a nice little irritating grain of sand around which we unwashed folks can post our little pearls of wisdom.
Some of the other posters have opined that deflation might be the reason that the dollar is up vs. the Euro. Certainly, when you wipe out huge amounts of financial paper through write-downs and deleveraging, you reduce the number of dollars in circulation.
But consider that there is over $6 trillion in cumulative trade surplus waiting to rush in to fill that hole by buying up our businesses for a fraction of their earlier values. Did you notice that there are now 26 Sovereign Wealth Funds with over $2 trillion in dollars waiting to roll into the U.S. with their carpetbags? The IMF tried to get them to subscribe to a voluntary code of behavior last week, and they said, "OK, so long as there is no transparency and no enforcement mechanism." They are getting ready to put those dollars back into circulation.
With the U.S. consumer tapped out, there is less incentive for these export-oriented nations to continue to prop up the dollar so that they can sell to the U.S. Maybe if Europe is in better (not good, just better) shape they will buy some Eurozone treasuries to prop up the Euro so that they can start selling more there. And, of course, they will start to grow their middle classes, but that could take a few years to accomplish.
When the SWFs get here with their big empty shopping bags, will there be enough desirable businesses to consume all of those foreign-held greenbacks, given the cratering of the stock market and the U.S. economy? Already, we see Lehman walking around with its hat in its hand, sipping on a bottle of low cost gin and hallucinating contributors out of the shadows. Financials have been a rather harsh experience for foreign investors. If they don't get something more to their liking, how long will it be before those dollars find their way onto the forex markets to obtain the currencies of other nations that still have something to export? Then where will the dollar be going?
And let's not forget about *dis*-investment. The market is tanking. Fannie and Freddie are tanking. Oops - breaking news - U.S. is assuming Fannie and Freddie's debt - which makes me wonder: will the U.S. Treasury be able to retain the AAA rating on its bonds? Just one of those vile thoughts that sneaks in when everything is going to seed (and that's a euphemism).
Yes, the Euro has problems, but nothing like those of the U.S. The dollar is heading down. I live in the U.S., but still with all of our aggressive, illegal invasions, its hard to complain about this present turn of events. Hope that we can patch things together eventually and become a kinder, gentler place that only invades other nations, say, every twenty years or so. Here's a wild thought: make them save up the money in advance *before* they can have a war. *That* should keep things relatively peaceful. We U.S. citizens need to work on developing a sense of shame and disgust; this is my little contribution to that project.
The Dollar Can Continue To Rally, Despite the Weak Economy
What is your comment? "Whoa, look at that dollar go, even though the economy is tanking!"
I'm wondering why you are not instead stating that the fundamental weakness of the U.S. economy augurs against a continuing rise in the dollar's value against other currencies, and identifies the recent rise as an aberration rather than a trend. We should beware of chasing the chart, rather than giving a true prediction, through analysis, of what the dollar is likely to do next. This brings to mind those boilerplate statements that warn us that past performance is not a guarantee of what will happen in the future.
You cite the 3.3% increase in U.S. GDP during the second quarter. However, that number is not properly adjusted for inflation, which was at the highest levels in 17 years. As the London Financial Times relates,
"The true story on these GDP reports is the dubious use of the "deflator," the inflation number that government subtracts from nominal growth to derive supposedly "real" growth. The GDP deflator they use is far lower than other inflation measures, which, if used, would reveal negative real growth."
(see business.timesonline.c...
titled "US GDP rise gives false recovery hope")
That's right - *negative* real growth, when properly adjusted for inflation.
As for the decrease in the trade deficit, that was in June, and was based upon a weakening dollar. The U.S. trade deficit stands at over 5 percent of GDP. According to the IMF World Economic Outlook report of this past April, a sustainable deficit would be between 2 and 3 percent. That is at least 40 percent less than the present deficit. June's decline in the deficit was 4.1 percent of the deficit, so the dollar would have to continue falling from where it was in June sufficient to trim at least ten times that amount from the deficit before the dollar could stabilize.
I would also note that the increase in exports that created the change in the deficit may itself be unsustainable, as U.S. manufacturing has been cored out over the past couple of decades through the relocation of plants to cheap labor havens under NAFTA, CAFTA, APEC and so on.
You write that "The Federal Reserve has already done its work and rates are low enough that they will not be decreased again in this monetary policy cycle. Everyone else on the other with the exception of the Bank of Japan still have plenty of room to cut rates."
Are you saying that because rates in the U.S. have gone down, now they are likely to go up? And are you saying that because rates in Europe have gone up that now they are likely to go down? That hardly deserves to be called an argument. Surely we must consider the specific economic and inflation-related factors before making such a judgement.
You end by saying that the dollar's recent strength may not be good for the U.S. economy. This is true, but the problems of the U.S. economy are much more serious than that. We are talking about an economy that is dependent upon constant foreign infusions of investments and credit. The kind strangers who are extending that credit have reasons of their own for doing so, and as the U.S. economy implodes, while inflation grows in China and elsewhere, some of those reasons are starting to look less convincing.
10 Financial Entities On the Brink
And yes, foreign investors have already lost their shirts on financials, and so are reluctant at this point to lose their trousers, as well. So, there goes another possible way of postponing massive insolvencies. How long will it be before CDO assets have to be sold for their true worth? Merrill Lynch just unloaded a bunch of these for a tiny fraction of their mark to model value, and they had to finance that purchase with their own money!
Hey, you guys who are tearing into Mish regarding this column: if you are such bulls, then how come you appear to have been hibernating in a cave during the bulk of this crisis? Wake up and smell the burning mortgage-backed paper.
Financial Crisis: Getting Old
Start Looking for a Bottom?
Forex Wrapup: Dollar Benefits As Traders Focus on Weak Economies Elsewhere
First of all, as I mentioned, as recently as July 30th Grace opined that the dollar rally was likely to stall just as it really took off, so based upon what should we watch her for further news?
Secondly, as everyone knows and agrees, if Trichet continues to increase interest rates, that favors the Euro and puts downward pressure on the USD, not the other way around as you have stated.
Thirdly, yes, the European economy would be able to export more if the dollar is stronger, so I agree with you there, although of course a stronger dollar means that the U.S. can continue to run a deficit better, which feeds inflation in Europe, and that is an offsetting concern that may make the ECB, whose mission is to control inflation, take a hard line on interest rates.
Finally, the more inflation China has the less inclined it will be to continue supporting the dollar, which is the most important single thing that has kept the dollar afloat at all for so long - so Chinese inflation is not good for the dollar. One could argue that the present decline of commodity prices helps to *reduce* Chinese inflation, and therefore gives them more room to support their exports to the U.S. by supporting the USD, and that would be a reasonable argument, but you seem to have said the opposite.
And, the U.S. does not really benefit from a rising dollar, because as the world's largest debtor nation, the less its currency is worth, the lower the value of its outstanding debts to others. Inflation always favors debtors, although of course if they have to borrow more the cost of borrowing will go up.
A Closer Look at the Dollar Rally
goldmoney.com/en/comme...
"When central banks intervene in the currency markets, they exchange their currency for dollars. Central banks then use the dollars they acquire to buy US government debt instruments so that they can earn interest on their money. The debt instruments central banks acquire are held in custody for them at the Federal Reserve, which reports this amount weekly.
"On July 16, 2008 (the closest date of the weekly reports to the July 15th low in the Dollar Index), the Federal Reserve reported holding $2,349 billion of US government paper in custody for central banks. In its report released today, this amount had grown over the past three weeks to $2,401 billion, a 38.4% annual rate of growth. To put this phenomenally high growth rate into perspective, for the twelve months ending this past July 16th, assets in the Federal Reserve's custody account grew by 17.3%, which is less than one-half the growth rate experienced over the past three weeks."
That is $650 billion in just three weeks. To give an idea of how much money this is, I think it is about 4.4 percent of the GDP for the entire Eurozone. One would have to think that intervention at those levels is not sustainable. Rather, it is probably an attempt to batten down the hatches by wringing out speculative bets vs. the dollar in preparation for the inevitable continued eruption of very, very bad economic news from the U.S. The goal would probably be to prevent a disorderly decline of the U.S. currency.
A Closer Look at the Dollar Rally
The main thrust of the post, regarding currency intervention supporting the U.S. dollar, is not affected by this correction. --LT
A Closer Look at the Dollar Rally
A Closer Look at the Dollar Rally
Here is the chart (you have to change the FROM: date at the bottom to 6/1/2008 to get a good view, as the Ruble's
re-valuation otherwise messes it up):
tinyurl.com/6c3fzg
As can be seen, not only the Euro, but also the Swiss Franc (CHF), the Japanese Yen (JPY), the Canadian Dollar (CAD) and the British Pound (GBP) have all fallen off dramatically vs. the dollar since August 1st.
So, the claim that this is due to Euro weakness rather than to support for the dollar cannot be, well, supported.
Interestingly, the yuan (CNY) has remained pretty much level with USD.
Even more interesting, the Russian ruble (RUB) has shot dramatically *up* vs. USD.
So, I get the impression that there is a support operation going on for the dollar. China is already supporting it and probably did not want to do more at this point. Russia probably did not want to get on board because of its strong antipathy to the U.S., which has tried to build a first strike capability against it in Eastern Europe, and may have instigated the recent brush-up with Georgia. But the European and Swiss Central Banks, which has swap lines already set up with the Fed that perhaps were the instruments of this (hypothetical) support, seem to have done more than their share. Canada is more resource based, so given the central bank support from ECB and the Swiss, may have fallen just because of its commodity dependence - or maybe it actively helped, too. As for Japan, they've been supporting for a long time via the carry trade, but now carry is down somewhat due to the volatility in the forex, which makes those trades more risky (which by the way does not indicate much confidence that the recent USD moves will continue monotonically, or stabilize, either). But they do have problems of their own, in part from having supported the carry trade for so long. So, maybe the Japanese decline vs. USD is just a knock-on effect of ECB and Swiss pro-USD intervention, combined with JPY weakness.
Well, that is very "speculative"... (no play upon words intended or taken), but what seems certain is that we are seeing the dollar moving up rather than the Euro moving down due to Eurozone weakness. If the Euro and CHF are moving down somewhat more than the Yen or the yuan, it is probably because those are the banks most actively intervening on behalf of USD.