Market Tales Get Taller 13 comments
an article to
-
Font Size:
-
Print
- TweetThis
When inexplicable events perplexed our early forbears, village wise men concocted elaborate and colorful explanations to soothe the populace. Earthquakes, hailstorms, and solar eclipses were all ascribed to root causes that made sense to the villagers and increased the esteem of the story tellers. The recent, unexpected surge of the U.S. dollar has led many Wall Street witch doctors to conjure a series of logic-defying tales to give reason to what is surely the random scramble of a confused herd. Wall Street spun similar yarns during the dot.com and real estate bubbles as investors groped for reasons to justify sky high prices.
The recent surge, which has pushed the dollar up more than 30% against some currencies in recent months, is purely a short-term technical phenomenon. The move is caused by global investment deleveraging, in which major financial players are reversing (unwinding) risky trades and piling into what is erroneously perceived as the safest haven they can find. Increasingly, foreign assets, many of which had appreciated more than American assets, have been sold, and the proceeds stashed into U.S. Treasury bonds, which these investors believe to be the Fort Knox of finance. The cascade has caused momentum trades, margin calls, redemptions, and other factors having nothing to do with the underlying fundamentals of the dollar or the U.S. economy. In fact, all that has happened to the U.S. economy, and all that the government has done, and is likely to do, in their misguided attempts to contain the damage, is extremely bearish for the U.S. dollar.
Mesmerized by technical moves and oblivious as always to the fundamentals, the Wall Street brain trust has offered flimsy explanations. One popular rationale is that as bad as things are in the United States, they are even worse every place else. Still another is that since the U.S. was the first country into the crisis that we will be the first nation to come out. Still another is that since our government is acting more boldly than most to tackle the problems, our economy will not suffer as badly as others where governments have been slower to react and more timid in their responses. In addition, many still perceive the United States as the citadel of stability in a world of second-rate economies.
However, if we look beyond these "explanations," the fundamentals loom simple and irrefutable: American borrowers of all stripes cannot afford to repay the trillions of dollars we owe. Over the past decade, the vast majority of lending has come from abroad, and as Americans don't pay, the losses show up on foreign balance sheets. Since we blew most of the money we borrowed on consumption, we simply lack the industrial capacity to repay our debts without resorting to a printing press.
In bankruptcy, both the debtor and creditors are affected. However, while creditors take a financial hit, ramifications for debtors are typically more severe. Creditors are generally better prepared to absorb their losses. However, for bankrupt debtors usually much more substantial changes ensue.
Since America is the world's biggest debtor, with our IOUs broadly held by every creditor nation, the effects of our bankruptcy are being felt worldwide. However, while our creditors are suffering now, their pain will be temporary and relatively mild compared to what awaits Americans.
So while it may appear to some that things are worse abroad, that is only because the full extent of our problems has yet to be reckoned with. The main lesson our creditors will learn from this crisis is not to lend American consumers any more money. Once the lending stops, our "cart before the horse" borrow to spend economy will crumble. While the rest of the world absorbs their losses and moves on, we will be digging our way out of the rubble for years to come.
Earthquakes are caused by the fundamental shifts of tectonic plates beneath the Earth's surface. A similar move is underway in the global economy. Describing either event without a basic understanding of either geology or economics will simply result in a tale being told by an idiot.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Joseph L. Sha...
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
Now you want to peddle a book explaining these "impossible to foresee" events. These events were not impossible to foresee for many.
You got blown out of the water this year with your dogmatic approach. Get over it.
However, if the US continues to look like a safe haven then the dollar will keep it's rally even as its economy slows more. The bet is that the US economy will loose steam slower than Europe or emerging markets. And maybe even Asia as well. Would you dump your money in any European economy right now, how about SE Asia. If your answer is no (fund managers already gave a resounding no to that question) then you should believe in a dollar rally even though the US will hurt badly the next 2 years.
Actually if the next President does the right thing he will make the US hurt alot to squeeze out bad financial institutions, market bubbles, inflation, asset bubbles, and real estate and derivatives speculators. Then he should re-inflate the market to get business as usual started without any risk of inflation or fear the US deficit will mushroom anytime soon again. Politically, it's best to di it the first 2 years than 2 years before a re-election. In fact, you can blame most of the pain on the last President who rightly derserves it.
Tell me how exactly we're going to pay off the national debt.
Jim,
Tell me you believe that the markets have been behaving rationally for the past 4 months. Tell me it has all made perfect sense to you and that you're profited handsomely.
Constructe,
Tell me how you "re-inflate the market to get business as usual started without any risk of inflation or fear the US deficit will mushroom anytime soon again. " That's a neat trick, re-inflating without any risk of inflation.
I'll play your gamble because that is what I saw originally.
We take out a 2.7T loan in their currencies.
we then lower our treasury interest rate to 0.
when this happens investors wont want to hedge their currencies with ours because guess why? they wont make any profit doing it.
buy their gold. we buy all the gold. they get our dollars.
use their currencies from that 2.7T loan to invest back into their own markets and buy their equities. their markets go up, their dollars stop inflating and start deflating.
we sell the gold back to them, we get our dollars back. now their economies are stabilized.
we sell their equities and market securities. we get their cash.
we buy their exports with their own dollars. they get a reset of their finances, we get our economic goods.
I was talking to god and the devil in this last game, and I believe it too.
Yep. constructe said it best. I learn.
The Americans will keep playing this game until it collapses, and then the Americans will simply renege on their debt. The Asian economies will be wiped out. As for the Americans, who would also be in economic trouble after such a move, all they have to do is start a program of rebuilding factories, infrastructure, etc. and not only would there be jobs for every American, but Americans would regain all the physical plant they need to continue economic dominance (remember that in the 1950's Americans were not only the biggest consumers but they were AT THE SAME TIME also the biggest producers). They will come out of all this smelling like roses! If there is competition for natural resources because of this then the Americans can call on their powerful military to ensure supply.
People like Peter Schiff say that the Asians will rebel against the West and become consumers themselves, but I question whether the Asian world can ever be "Western-style consumers". There are cultural issues that suggest that only the West can be the West.
In other words: the EM's will have to keep playing along with whatever game the U.S. conjures up.
? what happens to the USD if the discount rate drops to .50 as some Fed Governors have indicated recently?
Does it become the currency of choice for the next carry trade? And if so, how does the Dollar react?
The market has lost 7 trillion, real estate, 4 trillion and all our other toys 1 trillion. That's 12 trillion versus the 2.5 government fiat. It's not even close.
Dollars have gained and will continue until at least parity with the Euro.
Visualize a dollar compared to a 2007 house at $240,000.
Now the same dollar is much larger because the house is only worth $195,000. Same for the market, SUV's etc.etc.
The world is awash in fiat and they are all deflating; it's relative.
If, just if, oil is around $150 by this time next year. Will the Dollar be at parity with the Euro?
I eagerly await your response.
This economy collapse will be world wide effecting politicians and people alike. The people will be hungry and unhappy because they wont have food or housing. What will the politicians do to keep their jobs? Who will they blame for this crisis? You can already see Putin telling the Russians it is the fault of the US.
And Obama will disarm our country...