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Friday October 2, 2009 - 12:20:15 GMT
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Strong dollar dream…..?

Key News
Stocks fell around the world for a second day, commodities dropped and the yen rose on speculation rising unemployment will damp the global economic recovery. (Bloomberg)

Our revels now are ended. These our actors,
As I foretold you, were all spirits, and
Are melted into air, into thin air:
And like the baseless fabric of this vision,
The cloud-capp'd tow'rs, the gorgeous palaces,
The solemn temples, the great globe itself,
Yea, all which it inherit, shall dissolve,
And, like this insubstantial pageant faded,
Leave not a rack behind. We are such stuff
As dreams are made on; and our little life
Is rounded with a sleep.
                      William Shakespeare

FX Trading – Strong dollar dream…..?

I’m so tired…I stayed up late reading last night….falling asleepppp at the keyboardddd….zzzzzzzzzzzzzzzzzzzzz!

"A strong dollar is very important to this country, I mean that, and it's very important that people recognize it," US Treasury secretary Timothy Geithner told a news forum at the Newseum in downtown Washington, Reuters reported Thursday night.

"It does bring special responsibilities and burdens on the United States and it's very important that we make not just Americans but make the world understand that we are going to go back to living within our means," he said.

Does the market take Mr. Geithner at his word? Mr. G is right about responsibilities and burdens of a world reserve currency, responsibilities that have been abused by several US administrations in a row. If Mr. G is right about his making the “world understand that we are going to back to living within our means” then it means global rebalancing just might be a serious policy stance (key word in that last sentence was “might”).

Living within our means is that same as saying the US will continue to realign its savings and spending pattern. If the process of more savings and less consumption is not hampered by the government with massive amounts of new public debt, then just maybe:  

    •    The current account balance (it has improved a whopping 50% in the last six months as you can see in the chart below) will continue to improve.
    •    The US will build a domestic pool of funds instead of pure reliance on external funding (read less dependence on Chinese and Japanese as US banker)
    •    US imports fall (relatively)
    •    Relative global growth falls, but lower leverage sets the stage for more solid future growth
    •    Exporters turn inward to build domestic growth
    •    The US dollar rises in value increasing US consumer purchasing power  
    •    The euro falls allowing Germany to export more at the margin
    •    Asian currency appreciation increases local consumer purchasing power spurring US and German exports to Asia
    •    Self-reinforcing Asian consumer boom provides the next secular wave of global growth with trade actually flowing both ways i.e. balanced
    •    We all live happily ever after

[Chart not available in text format.]

This process doesn’t have to mean the end of the world as we know it. But it does come with responsibility, as Mr. Geithner says, and it does come with pain of transition, as we all have already felt. The first responsibility is for the US to get its fiscal house in order—not likely a good bet especially with an administration that seems hell bent on government eating more of the private sector pie.

Germany is already balking at the idea of “global rebalancing,” as expected given they are the world’s major exporter and big beneficiaries of said imbalances. After all, the euro was created for German industrial dominance and a captive market for German goods. But maybe if the euro were trading somewhere are around 1.10 to the US dollar, near its purchasing power parity level, the Germans just might get on board the global rebalancing train. We now Spaniards and Italians would like a euro-usd at 1.10. Heck, even the French will go along there.

China of course has the most at stake here. The total lockdown of real people for the 60-year People’s Celebration of the virtues of communism says something about the potential for unrest there. Stability has a lot to do with party officials being able to deliver the economic goodies. The easy path is exports, the path they so masterfully built and continue to enhance and deepen. Does China believe they can maintain job growth or at least not give away too many, in order to make the painful economic model transition? They haven’t made that calculation yet based on the character of their stimulus and increasing incentives to targeted exporters. Near-term, their stimulus has created their own little V-shaped recovery.

From a policy standpoint, the responsibility and political reality of rebalancing don’t seem to be on the same page.

But let’s examine this briefly from what the market is saying. Yesterday’s US stock market dump, followed by hiccups around the globe last night, maybe the first sign that a global rebound ain’t all it’s cracked up to be. The numbers in the industrialized world bear that out, as employment isn’t rebounding and manufacturing is stalling, and banks ain’t lending. In the immortal words of the late great Mr. Rogers (children’s morning program host, not the other one): Can you say double-dip recession boys and girls? Sure, I knew you could!

Now let’s say you are the head of one of the world’s central banks. And you notice that your benchmark interest rates are effectively around nil given all the extra money pumping and debt monetization by you and your team of neo-Keynesian stalwarts. Your primary fear, especially in a world where headline prices are mostly heading south when north is the direction you expected (north bails out borrowers, south adds more pain), is that you are just about out of bullets in your monetary gun, you notice your pals over at the Treasury are quickly running out of taxpayer money to spend in order to “stimulate” the taxpayer (I know that sounded crazy but crazy is the order of the day in good old USA), just maybe you must admit that Mr. Market has already decided rebalancing is the order of the day and maybe if you get on board and help to speed the process it may keep you from having to see what you haven’t wanted to see--the rising probability of a major and long global depression.

After all, being an economic guru, you remember back to your Econ 101 course in college when the old school hard money professor you had (the real kook in the department who never could seem to get in groove with the econometrics program where all the smart guys were) told you about what happens when you artificially lower the rate of interest, save zombie companies, and throw good money after bad. Now the idea of malinvestment and the impotence of stimulus is all coming home to roost on your watch.


Sorry…I’m back. I was dreaming about the idea of US officials finally showing some market responsibility and allowing Mr. Market to cleanse the system so we could have strong vibrant growth sometime in our lifetime. I know, my apologies, it was a weird and incredibly unbelievable dream.

Isn’t there a jobs report due out this morning?

Jack Crooks
Black Swan Capital LLC 


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