On Markets, Recession, Bailouts and Competitiveness

click to enlarge above charts

From: "Recession’s Grip Forces U.S. to Flood World With More Dollars" (Bloomberg):

In an all-out assault on capitalism’s worst crisis since the Great Depression, the U.S. is taking on the role of both lender and borrower of last resort for the global economy.

The Treasury, on course to borrow some $1.5 trillion this fiscal year, may tap global capital markets for even more to finance a fiscal stimulus package of as much as $700 billion and provide additional bailout money for banks.

What is the future of the US dollar in this situation? And how is it possible in the future to see a strong dollar once the deleveraging is less aggressive and forced?

On the daily chart, the EURUSD is developing a descending triangle, which should imply an even stronger dollar with an objective at $1.19.

At the same time, in the next chart you can see that the S&P has already printed a breakout to the downside. On both charts there is a positive divergence of the MACD indicator. Technically, we should see a quick return of prices above 830-850 to consider the breakout of the triangle failed. It is interesting that the dollar has not followed the stock market in this phase. The market can rebound toward the 1000 level in the next weeks should the failure of the triangle be confirmed and the dollar lose ground toward the 1.35 level.

From a fundamental perspective, I see a weak dollar in the future as President-elect Obama plans to inject billions and billions of borrowed money in the system to create jobs, reform health care, and avoid a nasty recession. How long will investors trust the ability to repay all this building debt? The prospects could be really scary.

The troubles of TARP have initiated another down leg of financials. The Citigroup (C) crisis is in this context. Robert Reich's article, 'Why CitiGroup is About to Be Bailed Out and Not General Motors", reports all the drama and the dilemma of the US. In the middle of an historic shift of power to the Asia-Pacific part of the world, the US has to fight to make survive its icons of the 80s and 90s.

It looks pathetic and astonishing at the same time; such a fast and catastrophic blow out of the financial system and an important part of the "old" economy. Politically and socially there are a lot of pressures to keep automakers alive, or at least allow them to reduce their dimension and consolidate their activities in a less traumatic way than bankruptcy. Letting the old and inefficient businesses go bankrupt during the "creative destruction" process can be fine, but how are you going to replace the lost jobs? It should be with something which offers more added value.

What are the ideas? Where and how to be competitive in this environment? In which sectors, when competition from China and India is starting to come also from the hi-tech and higher value added sectors? It is going to be interesting to see what the western countries are going to do about it.

Comments

[PeteK:]

CitiGroup does not have UAW on its back.
That's the difference.

2008 Nov 24 06:43 AM