Tuesday August 29, 2006 - 10:31:07 GMT
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Black Swan Capital - www.blackswantrading.com
Two scenarios for the buck
â€˘ German consumer confidence rose to the highest in almost five years. (Bloomberg)
â€˘ Germans Leave in Record Numbers, Spurred by Unemployment, Taxes (Bloomberg)
â€˘ Japan's jobless rate fell in July, although household spending fell for the seventh straight month. (Reuters)
â€˘ Key Reports (WSJ):
7:45a.m. ICSC Store Sales Index For Aug 26 Wk. Previous: -0.2%.
8:55a.m. Redbook Retail Sales Index For Aug 26 Wk. Previous: +0.3%
10:00a.m. Aug Conference Board Consumer Confidence. Previous: 106.5.
2:00 p.m. Fed Minutes
5:00p.m. ABC/Wash Post Consumer Conf For Aug 27 Wk. Previous: -14.
â€śThere was scant support at Jackson Hole for the notion that overseas growth could support US economic activity. Itâ€™s not hard to see why: It hasnâ€™t happened for twenty years, as the US has been the main engine of global growth in good times and the provider of a safety net for the global economy in times of stress, as in the Asian financial crisis. Export volumes must grow twice as fast as imports to promote even a moderate contribution to US growth. Ironically, too, despite their acceptance of globalization, some still view exports as an appendage to the huge US economy. For them, the key issue was whether a coming housing collapse threatened a US recession.
â€śIn contrast, I think that for the first time in two decades healthy growth abroad will matter for the US outlook. First, the improvement in global growth is broadly based, lately has been driven less by exports and more by domestic demand, and seems sustainable. Second, US-based companies are increasing market share abroad, so faster growth in overseas demand will disproportionately boost US exports. And I expect import volumes to grow more slowly, reflecting slower US domestic demand growth, the substitution of US production for imports in some industries, and reduced oil import volumes.â€ť
We think Mr. Berner sums up the dollar debate pretty well.
1) If growth overseas can carry the US, while US domestic demand slows, we would expect yield AND growth differential to tighten up between the US and its competitors. Thus, sell the buck.
2) But, if we witness a global recession (or â€śmajorâ€ť slowdown), that might spawn the risk-reduction trade, which in turn leads to a bunch of bucks heading back to the US, which in turn could lead to a surprise rally in the US dollar.
Are there many other scenarios in between these two? Yup! But itâ€™s early in the morning, we are awaiting our next tropical storm/hurricane, and we wanted to keep it simple.
Jack Crooks, Black Swan Capital Black Swan Subscription-based Service
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