Tuesday August 16, 2005 - 11:39:26 GMT
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Black Swan Capital - www.blackswantrading.com
Mr. Consumer driving the dollar
“The greater the uncertainty, the more people are influenced by the market trends; and the greater the influence of trend following speculation, the more uncertain the situation becomes.”
A couple of people are growing increasingly concerned about the American consumer—a couple of smart people that is:
Stephen Roach, Chief Economist at Morgan Stanley
“I don’t know where oil prices are going. But I do feel strongly that an important macro threshold has now been breached -- one that adds unmistakable tension to the world economy’s greatest imbalances. At the current level of oil prices, I suspect one of two things will happen -- either the over-extended American consumer will finally cave or the long-awaited US current account adjustment will finally unfold. Courtesy of a full-blown energy shock, the venting of global imbalances can no longer be deferred indefinitely. If consumers remain unflinching in the face of sky-high oil prices, a plunging saving rate will push an already outsize current account deficit to the flash point,” writes economist Stephen Roach.
Lacy Hunt, Chief Economist at Hoisington Investment Management
“The rate of growth in bank reserves and in the broader monetary aggregates is quite restricted. For example, in the last 12 months the M2 money stock is only growing by 3.7 percent per annum. And over the last century it's risen by almost seven percent per annum. So, that's a very substantial slowdown.
“But if you will remember in 1990 we had a condition of restricted monetary conditions, rising oil prices. The Fed miscalibrated and we had a recession in 1990 and 1991. Ten years later we had the same pattern, rising fuel prices. The Fed had restricted policy in place, and the Fed once again miscalibrated.
“But in the current environment where the Fed is bringing monetary growth down, and very sharply so, the consumer initially has paid for that by cutting back on savings. But ultimately the historical record is quite clear the combination of rising oil prices in the face of monetary deceleration leads to a cut back in discretionary spending.”
If there is a point here it is this: Maybe people (we are guilty as charged), have grown too optimistic about the US economy.
Existing monetary “accommodation” and housing, coupled with a strong GDP wind at their back, are good reasons why the Fed will “miscalibrate,” as Mr. Hunt says. For already we are hearing “it’s different this time, an inverted yield curve doesn’t mean recession.” The phrase “it’s different this time” gets us very nervous.
If the Fed goes too far—they will likely make up for it by going back the other way. But, they are driving a supertanker, so the damage will be done. For now we bask in the belief the dollar rallies on rising growth and rising interest rate differential. But if Messrs. Roach and Hunt are correct, those two dollar props could disappear quickly.
Black Swan Capital
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