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A “Stock-Less” Recovery in the US Economy

|Includes:CNY, iPath EUR/USD Exchange Rate ETN (ERO)

As a Canadian investor I believe the US will be the last to recover from the current recession. Expect a China led recovery (Fall 2009) with uneven recovery in the rest of Asia and South America (Spring 2010). The EU return to its plodding 2-3% growth over this period.

The world needs the
US to recover even as its share of the world economy shrinks. The best way for the US to recover is to devalue its currency. Normally this would trigger a “beggar thy neighbour” devaluation war but in this case the world will allow the US dollar to fall at a controlled rate to about 2/3 of its current buying power. The result will be a 3-5 year recovery repairing the US trade balance problem, expanding manufacturing (jobs) and reducing in the US foreign debt (in “basket of currencies” terms).

The result will be a “stockless recovery” (as opposed to a jobless recovery). Job growth will be dramatic but US company stock values will grow at about the same rate as the US dollar decline. In Yuan (or Euro) terms the S&P will be flat for many years.

Collateral damage: During its controlled decline the $US will be unreliable as a basis for long term contracts. Oil may have a daily quote in $US but oil contracts will be made in either Euros or Yuans because those will be the stable currencies in their spheres of influence. There will be no single reserve/transaction currency but gradually the Euro and Yuan will replace the $US and this will put added pressure as unwanted $US find their way home.
Stock Selection: For a US investor buying US stocks will be good. . .for international investors US “growth” stocks won’t. US companies with international operations may do well but the currency risk will impact their performance. The investor will be confronted with more uncertainty because their best bets will be on unfamiliar international companies operating under unfamiliar financial rules. Diversification will be your friend and buying international companies on US exchanges (like shippers) will be a safer bet.

China Currency Ascendance: Notice that a $US at 2/3 of its current buying power will instantly make China the largest economy in the world. Size does matter and China will start to demand all its contracts have Yuan denomination (makes 5 year central planning easy to do if you can avoid currency distortions). Nearby neighbours (like India, Japan and Korea) will get used to the shift. Eventually so will we all.


Stocks: ERO, CNY