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Thursday January 20, 2005 - 11:07:59 GMT
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More evidence for the new $ theme, but Buffett says no!


From Bernard Shaw's play, The Devil’s Disciple

Major Swindon asks, "But what will history say?" General Burgoyne replies, with cynical Shavian wit, "History, sir, will tell lies, as usual."

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Remember that conversion-flow thing I was talking about in last Friday’s Currency Currents? Well, I’m seeing more pundits publicly pontificate on the possibility that pushing the dollar lower is not going to cure the current account deficit. It’s funny how the market’s price mechanism has a magical way of changing the minds of the players.

From Caroline Baum’s column in Bloomberg today:

• The benefits of a weaker dollar ‘may be lost by the adverse effect on overseas economies,’ which depend on the U.S.'s huge appetite for imports to stimulate domestic output, says Jim Glassman, senior U.S. economist at JPMorgan Chase & Co.

• “Looking at bilateral trade deficits in general, ‘it's hard to find a statistical relationship between movements in the dollar and trade,' says Jim Bianco, president of Bianco Research in Chicago.

• “’Even if there is one,’ Bianco says, ‘the trade deficit is about 25 percent of the total U.S. manufacturing base. We don't have the domestic manufacturing capability to produce what we need to correct it.’”

Hmmm! As Morgan’s Stephen Roach said in his comments last Friday;”…imports are 52% larger than exports, making it mathematically impossible for the US to export its way out of its trade deficit.”

So the evidence mounts to support a new theme—dollar depreciation is overrated as a policy tool for solving current account problems. (See Currency Currents Monday 17 Jan 05)

In addition to this new view on the current account gaining momentum, strategists are picking up on the repatriation theme as they search for reasons why the dollar has rallied:

“A tax cut signed by Bush last year encourages multinational companies to return earnings from foreign subsidiaries to the U.S. at a tax rate of 5.25 percent instead of the normal 35 percent top corporate rate. Drugmaker Johnson & Johnson said on Wednesday it would repatriate about $11 billion in past earnings, while Pfizer said it was considering repatriating up to $38 billion,” according to Reuters.

Yikes--$49 billion dollars! Even if you are Warren Buffett, that’s a lot of dough. And it’s heading back to Uncle Sam’s shores. And should this dough—hot money as it heads into US banks (remember that hot money flow at the margin can be very beneficial for a currency despite the structural stuff), actually be reinvested into US plant and equipment (which I believe is the intent of the tax provision), instead of Chinese plant and equipment, we would have to call that DFDI—Domestic Foreign Direct Investment. And I bet that wouldn’t be bad for the dollar.

But we must put this potential dollar good news in proper light. For the all-knowing and all-seeing favorite of the financial press sycophants (and dollar doom and gloom crowd), Mr. Warren Buffett, allowed a few crumbs of communication to fall from his table of knowledge recently. Mr. Buffett sees no change to the story. It’s the current account. The dollar has to fall. But then again, if you were sitting on a reported $12 billion short position, and the dollar was in rally mode, you’d probably be saying the same thing. After all, one doesn’t want to dump that stash when the bids are heading south.

But, Mr. Buffett has been very right on a lot of things many times before. So, regardless of whether or not it appears he is talking his position, the players are probably listening. Needless to say, but I shall, I hope Mr. Buffett is wrong. For if he is, and his capitulation is publicized as much as his short position, it could provide some rocket fuel for the “new” dollar trend.

Jack Crooks.


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