Time To Hedge Dollar Exposure 15 comments
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Questions in the aftermath of the bank rescue:
As details emerge regarding the government's proposed plan to assume toxic bank debt and backstop the mortgage and money markets, the estimates of the cost are quite high. How does such a massive assumption of debt affect perceptions of the dollar and the creditworthiness of the U.S.? How will it affect government borrowing going forward (and thereby interest rates)? How will it affect inflation? How will it compete for investment dollars with corporate borrowing? How will all of these affect economic growth in the U.S.?
It's interesting to see that, with stocks soaring today, gold is moving higher (top chart); the euro is moving higher vis a vis the U.S. dollar (middle chart); and 10-year Treasury rates are soaring. Time to hedge U.S. dollar exposure?
(Click charts to enlarge.)
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This article has 15 comments:
I see a parallel in the Republican/Neo-Con effort to make it impossible for the Democrats to expand (or even maintain) social programs, which they see as an impediment to a capitalist economic system.
Am I reading too much into the recent economic debacle? Was it deliberately contrived or was it due to incompetence? Or does it make any difference, since social programs for the poor and middle class must be put on the back burner for a decade?
Yes, main street is going to be eating the crumbs from the tables of the politicians and the big companies . Only when we have lazie faire capitalism will things straighten out. But the bailouts of today allow the in crowd to unwind there highly leveraged positions , where the little guy is going to see his net worth shrink into a black hole.
No paper is safe anymore. The Fed bankster cartel will destroy America, then control or sell what is left. Mad Max Bartertown economy is possible. When land is dirt cheap, sell metals and buy a small farm so you can feed your family.
The lead bulls smell lion. When the herd gets nervous, spooks and stampedes, it will be too late.
Juan McAmnesty and Hussein Osama will change nothing. Only one presidential candidate, Chuck Baldwin. understands what is happening (Fed) and what can be done (repeal). The corporate media cartel has imposed a near total blackout on his campaign and his Constitution Party, America's third largest and fastest growing political party. This speaks volumes. We now return to the regularly scheduled elephant and jackass show...
Buy when there is blood in the streets, even if it is your own blood.
On the other hand, rising inflation expectation will mean interest rate rise expectancy; which will mean $ appreciation. If foreign economies also raise rates, it will be $ neutral. In relative relative terms, foreign economies might cut rates to combat slowing growth (particularly in emerging economies - for example India inflation is at 12%; interest rates are closer to peak than trough; growth is slowing. As inflation reduces, even if simply because of the base effect; there will be a natural tendency to cut interest rates to re-ignite growth); reduction of the interest rate differential will mean a stronger $. In the US, ability to cut interest rates is limited because rates are low to start with (US interest rates are already lower than other economies ex Japan). If US interest rates are cut or held for a long period of time; it might mean devaluation, but this is unlikely because other economies too will likely cut rates and so interest rate differentials will not change or will slant in favor of a stronger $.
You will get the same answer if you try to determine exchange rates using a purchasing power parity formula.
Mind you, ultimately higher deficits will lead to a weaker $; US is amongst the least fiscally disciplined nations in the world; this needs to change and I believe it will. My own view is that deficits will reduce over time for several reasons including significantly global economy sustainable quality recurring earnings together with realization of capital gains (i.e. foreign profits coming back home elevating $ demand).
I also believe that the $ decline over the last several years was a necessary evil. US Corporations & Institutions are the most aggressive global investors, with high levels of capital, intellectual property and management expertise. These corporations & institutions have risen to the challenge of globalization and have been investing mind boggling amounts internationally. Because of this, the demand for foreign currency has been elevated significantly and it has led to a devaluing $. Over time, these investments will generate returns. As and when these returns come back to US, the $ will resume strength because the demand for foreign currency will fall as international investment opportunities reduce; at the same time demand for $ will elevate as foreign profits are converted to $ to bring the money home and provide investor returns. The only big problem is whether US corporates will want to bring the money home, given the present tax laws. I believe if the US rationalizes its tax laws, the money coming back will largely eliminate deficits in a relatively short time.
So why has the $ strengthened recently. It is risk aversion calling money back to the mother Country; this elevates demand for $ from the remitting foreign countries. It is also bringing back home capital gains arising during the 2003-2007 bull market; true the gains are less than they were a year ago, but over the course of the bull, the returns have been out-sized and a person who invested at the start of the bull and held is still significantly "in the money". It is also because tight liquidity, a lack of confidence and risk aversion are now leading to a reluctance to invest globally; thus the demand for foreign currency is declining significantly. So its withdrawal of capital & profits combined with less fresh capital deployment.
Once growth opportunities present themselves internationally, this money will flow out again and weaken the $ once more - until the profits of investments start coming back to US in the form of dividends. The main thing required to eliminate the volatility is to have a sensible tax code which does create a dis-incentive corporates from remitting profits back to US.
Until recently, the US consumer has had a voracious appetite for foreign goods and services; bad news on current account. At the same time there has been capital outflow to finance overseas investments; which is bad news for capital account. The deficit trend can reverse once investor returns flow back to US and as increasing wealth in foreign jurisdictions increased demand for US goods and services.
Nothing much matters in the long term; that is other than preserving what the US really has - intellectual property, dynamic management and capital; for this is what creates wealth and he who controls wealth is the biggest beneficiary. Give up these competitive advantages and there will be hell to pay. Outsourcing is just fine, foreign contract manufacture is fine; in fact both are probably good for US. These are tasks which anyone can do; there is little by way of an entry barrier and the margins are thin.
What is important is that the cutting edge innovations (need not be purely technology/health-care type IP; can even be something as simple as management expertise) continue to flow out of US; this is what moves the world onwards. Keep the best global scientists and managers home; these folks with access to capital will keep the US a dominant force. Once this changes; the end is near - frankly at this point in time there is no threat of any significance to US.
While the rising deficits are no doubt bad news for the globe as it means an expectation of an elevated period of global inflation and slow growth, and possibly indicates a further contraction in profits and multiples which is not good news for capital markets - it is by no means necessary an indication that the $ is dead.