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Monday January 5, 2009 - 13:11:19 GMT
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We’re Bullish on the US Dollar Today ... and Tomorrow!

Key News
• U.K. Rescue Fails to Spur Loans (WSJ)
• Japan's Central Bank Weighs Measures to Curb Stronger Yen (WSJ)

Key Reports Due (WSJ):
7:00 a.m. ICSC Chain Store Sales Index For Jan 3: Previous: -0.5%.
10:00 a.m. Nov Construction Spending: Expected: -1.2%. Previous: -1.2%.

“How charming is divine philosophy!
Not harsh and crabbèd, as dull fools suppose,
But musical as is Apollo’s lute,
And a perpetual feast of nectared sweets,
Where no crude surfeit reigns.”

          John Milton

FX Trading – We’re Bullish on the US Dollar Today ...  and Tomorrow!

Do you remember what economists used to tell us about the global economy? If not, let me remind you. 

I remember the mantra-like chant from very clearly: There are major imbalances across the global economy.  Some countries save too much, others borrow and spend too much. 

Of course the US seemed be the one to blame no matter the shape or weaknesses elsewhere.  The gut wrenching credit crunch of 2008 is a symptom of global rebalancing.  And there’s no reason why it won’t continue well into 2009.  But my guess for 2009 is this: the United States economy could get a lot uglier, but the pain of rebalancing will be even more severe in Europe, Asia, and Latin America and hit those economies a lot harder than is now priced into the market.

I think the US relatively good on that score!

Whether you believe he was being self-serving or not, I think Treasury Secretary Paulson nailed it in his recent comments to The Financial Times newspaper:

“The US Treasury Secretary said that in the years leading up to the crisis, super-abundant savings from fast-growing emerging nations such as China and oil exporters – at a time of low inflation and booming trade and capital flows – put downward pressure on yields and risk spreads everywhere.

This, he said, laid the seeds of a global credit bubble that extended far beyond the US sub-prime mortgage market and has now burst with devastating consequences worldwide.

“’Excesses . . . built up for a long time, [with] investors looking for yield, mis-pricing risk,’ he said. ‘It could take different forms. For some of the European banks it was eastern Europe. Spain and the UK were much more like the US with housing being the biggest bubble. With Japan it may be banks continuing to invest in equities.’”

Put another way, the US financial system became saturated trying to recycle all the excess savings from the export-model and oil exporter countries.  It is their lack of internal investment alternatives and their decision not to invest into their own economies, for both political and economic reasons, is why there was virtually free-money available for the creation of massive levels of new exotic derivatives and one of the core reason for the lack of US consumer savings.  

US consumers were saving through their assets, i.e. booming housing and stock market (401K wealth) values; why save?  As you know, the two main wealth drivers in the US economy—housing and stocks—have been hammered.  And guess what: The US consumer is saving again!

In short, the US isn’t recycling excess savings flowing to the US from China and oil exporters because China’s exports and oil prices of have evaporated.  Of course through typical knee-jerk reaction, many commentators imply this is very bad for the US.  But these same commentators fail to mention this situation is much worse for economies dependent on creating wealth through exports, and the category here includes a whole host of countries: China, energy exporters (Middle-East, Russia, and Latin America), and emerging markets dependent upon foreign bank funding (which represents the majority). At the core of this is the US, as it’s no longer providing the funding.  As I said, US consumers are saving and US institutions are deleveraging. 

So, the pool of savings being created by the US consumer will help replace much of the lost reinvestment into the US from outside.  US institutional deleveraging is painful, but the process of cleaning away dead wood for potential future growth is continuing.  And remember, the US has funding mechanisms others don’t have—deep capital markets and flexible fiscal and monetary policy.

If I am right about a major sentiment shift about debt and risk taking going forward, the adjustment process in many other countries will be much more painful and take much longer than it will in the US.  They will have to make major changes to their model of export-Export-EXPORT.  This means developing a viable domestic market.  That means transferring economic and political power.  And that means a bunch of social unrest could be in the cards in 2009.


• Emerging markets of all stripes have been cut-off from their funding sources and are unable to make it up through exports in a world where the character of consumer demand may be changed for some time.
• Russia’s pure energy dependence economy is imploding and unrest is rising; some believe the Putin regime itself is in trouble of being toppled.  This adds to the potential Russia will lash out in order to whip up nationalist frenzy to divert attention from dwindling economic alternatives and freedoms.
• Social unrest in Russia will add to the riskiness to any investment into Eastern and Central Europe adding to the chances of country defaults in the region—Ukraine is teetering! This will add to the woes of European banking; they are hugely exposed to emerging markets in Europe and elsewhere.
• Rising tensions across the Eurozone only adds to already rising risk within the system as Greece and Italy fiscal status deteriorates by the day.  Unrest in Greece among youth and anarchist could be the tip of the iceberg for broader unrest across the Eurozone as unemployment rises.
• Global demand for exports has evaporated and China, the world’s biggest exporter is feeling the pain in a big way. Factories across China are closing and unemployment is rising fast.  Social tensions are rising.  This is a real wildcard.  China knows its dependence on exports primarily for growth is coming round to bite them.  Transition from export-oriented to consumer driven doesn’t happen overnight.  China was already moving down the path of consumerism, but in the foreseeable future rising unemployment and falling reserves and corporate profits will likely crush expected Chinese growth in 2009.
• Latin America is highly dependent on commodities prices and exports.  Already Ecuador default on its bonds because of falling revenues as oil prices have tumbled.  The prospect for a big rebound in commodities prices looks dim because global demand continues to weaken.  Tensions are rising across the region here too.

And yes, the US economy is in trouble too.  And it could get much worse for the US as unemployment seems set to climb a lot higher.  But keep in mind it’s all relative.  And relative to the potential for a lot more pain elsewhere, US financial assets could surprise.  It’s why we remain bullish on the dollar.


Jack Crooks
Black Swan Capital LLC


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