Stock Price Strength Notwithstanding, Economy and the Dollar Are Still on the Skids

The dollar continues to work its way lower, prompting people to shift more assets into riskier investments such as stocks. This is a trade that could persist for a time, and indeed, the Federal Reserve and the U.S. government are content to let it continue as it buys time for banks to repair their balance sheets and hopefully restores confidence in our economy. The policy isn’t without its risks, however and we ultimately see it ending badly.

The greenback’s slide is a tonic for commodities. Gold has notched even higher highs, for instance, but that’s really just a symptom of the problem. The real danger lies in the escalating costs of basic economic inputs. Most notable of these is crude oil, which topped $79 a barrel Monday.

From a technical perspective, oil prices have broken out of their trading range, which is likely to bring in more buyers for crude. With very little in the way of overhead resistance to keep prices in check, we could well wake up one morning soon to see oil prices once again in triple digits. Even without further increases, prices have moved up far enough so as to act as a governor on economic growth.

Make no mistake, despite the strength in stock prices during the past seven months, the economy is still in no great shakes. Home foreclosures are mounting, prompting the Obama Administration to unveil yet another plan to aid homebuyers who can’t afford their mortgage. The Fed is doing its part, buying up hundreds of billions of dollars worth of mortgage-backed securities from government agencies in an attempt to keep the lid on rates and spur the ailing housing sector. The banks, meanwhile, may be generating trading profits, but they continue to report deteriorating credit conditions and aren’t making new loans.

Economic figures such as industrial production and capacity utilization have come off their lows, but they remain well below where they stood during the last recession—and companies aren’t hiring. Consumer confidence is also far less than one would expect coming out of recession. Likewise, weekly new unemployment insurance claims have been declining but they remain above 500,000. So it’s a virtual certainty that the unemployment rate will continue to rise.

The official stance of governments aboard regarding the U.S. dollar, meanwhile, is moving from one of quiet concern to modest intervention. Brazil, for instance, has stepped in and imposed a 2 percent tax on foreign purchases of stocks and fixed-income investments in the hopes of keeping its currency, the real, from rising against the U.S. dollar. The real had climbed by a third this year, raising the cost of Brazilian exports. Other nations are likely to follow in Brazil’s footsteps, exerting greater control over their currencies. But given the imbalances in our own economy such moves will likely do little to stem the greenback’s relentless slide.

Comments

[bbro:]

Even if you adjust for a new normal the ratio of personal consumption
to the S&P 500 is still undervalued.....fair valuation with a 65% of GDP
consumption level would place S&P valuation at 1250.....BUT we all
know fear and greed rule short term moves....

Oct 21 05:25 AM

[Doc 224899:]

Dr. Leeb,

I've read Game Over and The Coming Economic Collapse, over and over. Like you, I bring a human studies background into play, and I try to come up with human explanations for market behavior.

I think that in a contracting national economy the absolute number of dollars traded in the major exchanges gradually declines, allowing upward pressure on the share prices of some, not all, stocks in spite of Main Street growing more and more impoverished. This allows the phenomenon of a "jobless recovery" in the market. The money is not "on the sidelines"... instead, it has fled from the market.

How much do you think foreign investors are buying and selling equities in American exchanges?

Oct 21 05:34 AM

[balois:]

All other things being equal, I do expect that my (few) stocks quoted in US Dollar increase in inverse proportion to the Dollar s slide against the Index Currencies, because
- these US companies derive a good chunk of their revenue (also cost) in forex, overseas
- they have excellent products and services that tolerate price increases in US Dollar, without customers being turned away (or practically cannot do without, no or limited competition)
So anything around a, say, 20 % increase todate in my US Dollar quoted stock portfolio since early 09 for me simply represents correcting the forex effect.

Have a good day

Oct 21 05:39 AM

[TTurk:]

I share your analysis on the dollar and the economy.

I am surprised so many "economists" do not understand the potential long-term problems associated with the current course of our economy and the approach being used to avoid the inevitable pain.

Just like the tech bubble and the housing bubble, this bubble may carry on for several years before the fine line of low interest rates, high liquidity, high trade and fiscal deficits finally crashes when the world has enough of financing our country's lack of financial discipline.

Oct 21 06:57 AM

[manya05:]

Yes, at some point the dollar may drop so much that all US-based assets (houses, stocks, land, consultants, etc.) will become so cheap that the rest of the world will come in an arrest the slide by buying everything is sight. But, on a price/value ratio, the US economy and the US worker are still way overpriced, there is quite a ways to go Even then, is this the future we want for our nation? to just be sold off in pieces by having a fire sale through currency depreciation?

Oct 21 06:58 AM

[tripleblack:]

[quote] The banks, meanwhile, may be generating trading profits, but they continue to report deteriorating credit conditions and aren’t making new loans. [quote, Dr. Leeb].

This is the bottleneck, has been from the start, and it demonstrates the fallacy of the strategy which is STILL being pursued.

Rather than feeding the capital needs of the economic engine which powers the nation, they are starving it.

Oct 21 07:39 AM

[User 353732:]

1. The dollar is an increasingly risky investment vehicle. For many investors it is risk aversion not risk appetite that is impelling them to flee the dollar, which can hardly be called a reliable store of value. As the full faith and credit of the US become debased to the point where the US Govt has neither the faith of the world nor the credit of national net worth and integrity, people will naturally seek other stores of value and eventually other media of exchange. This flight and quest will be reflected in the prices of various asset classes
2. The stocks of large companies that are predominantly in the hard asset business or provide truly essential goods and services to customers worldwide are a far better store of value than the dollar.

Oct 21 07:58 AM

[toobad41:]

Thanks Dr. Leeb for your insights. I might add that I've read and heard recently that oil will be in the triple digits (i.e. $100) by the end of the year. Those investors who don't invest in petroleum either in stocks or in the commodity will suffer. Those who do will do really, really good.

Oct 21 10:14 AM

[jse17:]

A two-part question for inquisitive minds:

1-What is the most out of favor investment vehicle imaginable ATPIT?

2-What fool would possibly place USDs into a MMF?

(Hint) Everyone has a long term, independent, contra-oriented investment philosophy until times get difficult! Additionally, I believe we may all agree that times are currently difficult! The more difficult the investment environment, the more likely the return to the investment fetal position!

As Barton Biggs states, it indeed takes great courage to be a pig!

Oct 21 10:55 AM

[Donald Ingram:]

Economic fundamentals continue to be very poor and deteriorating. Consider just the government revenue;
Personal income tax receipts down 20.1%
Corporate tax receipts down 54.4%
Social Security down $9 billion
Government outlays up by 17.8%, past fiscal deficit at $1.43 trillion
Housing foreclosures for 2009 at 2.4 million
Over the next four years (estimate) at 8.1 million

This is not an economy on the mend. It is still bleeding quite badly.
The only sectors that are showing robust growth are the stock markets and the government debt. This should tell you right there that there is something wrong! Duh.

Oct 21 11:15 AM